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World’s first longevity hedge for non-retired pension plan members completed

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The world’s first longevity index hedge against increases in life expectancy for a pension plan’s non-retired members has been completed.

The Trustees of the Pall (UK) Pension Fund and Mercer today have announced a longevity hedge with JP Morgan, executed and managed by Schroders on behalf of the fund, to mitigate the risk that non-retired members of the fund live longer than expected. The fund has entered into a GBP70 million contract based on future values of JP Morgan’s LifeMetrics longevity index. 

Previous longevity deals have focused on retired members only, making this transaction the first of its kind globally. Hedging against increased life expectancy of pension plan members who have yet to retire has, to date, been problematic due to the long-term nature of the risk and the difficulties associated with accurately hedging pension benefits that have yet to come into payment.

The hedge has a term of 10 years during which the fund’s trustees may choose to adjust the size and composition of the swap or decide on an alternative solution. The transaction requires no up-front cash and so the fund’s sponsoring employer does not need to contribute additional resources into the fund. The agreement results in the Fund receiving a payout if life expectancy improves at a greater rate than specified in the contract, and so allows the Fund to offset its liabilities.

Andrew Thomson, Chairman of the Trustees, says: “Like other pension plans, our fund has been hit by significant life expectancy rises over the last decade. This flexible and innovative arrangement helps us manage the key risk of longevity.” 

Gordon Fletcher (pictured), risk consultant at Mercer and lead adviser to the trustees, says: “In general, the uncertain life expectancies of people still yet to retire pose a far greater risk to pension plans than those who have retired. Current practice has been to focus on mitigating pensioner risk, so this new transaction marks a huge advance in the longevity risk market place. It is flexible with minimal cash implications on day one and is, therefore, likely to be of interest to many occupational pension plans that are actively de-risking.

“We are in active conversations with both UK and international pension plans that are de-risking, and with similar longevity indices for the UK, US, Germany, and Netherlands we anticipate international interest in this development.”

David Epstein, Head of Longevity Structuring at JP Morgan, says: "Index-based hedges are particularly well suited to hedging the longevity risk of pension plans with significant deferred and active members. JP Morgan is pleased that the LifeMetrics longevity index has played a pivotal role in this ground-breaking transaction."

JP Morgan has been a pioneer in the longevity swap market, executing the world’s first capital markets longevity swaps in 2008, including both index-based and named-lives longevity swaps.

Andrew Connell, Head of Liability Driven Investment at Schroders, says: “Index-based longevity hedges represent an important addition to the LDI tool kit by enabling plans to mitigate the longevity risks embedded in the liabilities payable to younger members. Schroders has been discussing these instruments with consultants and trustees for some time and so were delighted to work with the Fund and Mercer to deliver this solution.”

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