22 February 2010
Published in: Longevity - mortality
Deutsche Bank and BMW in £3bn longevity hedge
Abbey Life, the insurance subsidiary of Deutsche Bank, today announced that it has completed the largest ever longevity insurance transaction covering nearly £3bn of pension scheme liabilities for the BMW (UK) operations pension scheme.
Abbey Life will insure the longevity risks associated with about 60,000 pensioners in the scheme. BMW will pay Abbey Life a premium as with any other insurance contract, and Abbey Life will handle the management of the longevity risk and pay BMW a fixed amount based on their liabilities. The transaction covers longevity only and does not cover the total pension risk.
Abbey Life will spread a proportion of the risk to reinsurers Hannover Re, Pacific Re and Partner Re. Deutsche Bank would not disclose what percentage of the risk the consortium of reinsurers will take.
Abbey Life used the proprietary longevity modelling techniques and structuring expertise of Paternoster, the specialist pensions insurer, it said. Deutsche Bank is Paternoster's largest shareholder.
The longevity hedge has been constructed to "provide the flexibility to adjust the specific benefit structure," Deutsche Bank said in a statement. "Rather than just saying this contract is fixed for 60,000 people for this much money, they've added some flexibility whereby they can adapt to changes over the life of the contract," a spokesperson added.
The hedge is by far the largest longevity transaction; the largest prior to this was in July 2009, when RSA insured £1.9bn of pension liabilities with Goldman Sachs [see IERM, Longevity/mortality, 14 July 2009, RSA de-risks pension schemes].
It is the first longevity hedge syndicated across several reinsurers. This allows the market to "swallow £3bn of risk", Charlie Finch, a partner at Lane Clark & Peacock said. "This demonstrates that longevity hedges now have the scale to cater for even the largest schemes. There are around 100 schemes in the UK with the potential to enter into £1bn+ transactions. This syndicated approach could be adopted for further large transactions over 2010."
Last Wednesday, consultancy Hymans Robertson said it expects pension scheme risk transfer deals to double in 2010, from £7.8bn in 2009 [See IERM, Longevity/mortality, 17 February, Pension scheme risk transfers set to double in 2010].
The transaction is ground-breaking in a rapidly growing market for insurance against longevity risks, Ed Jervis, CEO of Paternoster, said: "The complexity of a transaction this size should not be underestimated and is only possible through a combination of highly specialized skills, flexibility and, above all, a thorough understanding of the trustees' objectives."