Towers Watson form Guernsey ICC to hedge pension longevity risk

15 December 2014

Leading global professional services company Towers Watson has launched a new service enabling pension schemes to gain direct access to the reinsurance market in order to hedge longevity risk for their defined benefit liabilities.

Based in Guernsey, Towers Watson Longevity Direct allows pension schemes to own a ready-made insurance cell that can write insurance and reinsurance contracts for longevity swap transactions. The structure significantly reduces the cost of hedging longevity risk for pension schemes by removing the need for an intermediary insurer to write the transaction. It also means bigger transactions can be completed and the best reinsurance pricing can be accessed.  Willis Guernsey is managing the Incorporated Cell Company (ICC) for Towers Watson and Appleby is providing the legal services.

Keith Ashton, UK Head of Risk Solutions at Towers Watson, said: "Access to the reinsurance market has become increasingly expensive and inefficient in recent years, but the appetite from defined benefit pension schemes to hedge their longevity risk has been growing strongly. Traditional intermediary costs can be several times higher than accessing the market directly and the aim of Longevity Direct is to provide more affordable and efficient access to the market.

"This structure also means the pension scheme can take advantage of the best possible reinsurer pricing, rather than having to compromise on pricing due to the intermediary's exposure limits.  We find that pension scheme and reinsurer interests are typically very aligned; a direct agreement can be much less complex than the longevity swaps we have seen in the past.  For these reasons we're confident that the opportunity to access the reinsurance market directly is one that will appeal to a range of pension schemes who have previously held back.  We already have a number of our clients which are progressing longevity hedging through this structure."

According to Towers Watson pensions-derisking transactions, such as longevity swaps, have grown consistently in volume and value in recent years. In 2014, £32 billion worth of transactions have been completed, double the previous year's total, in large part due to BT Pension Scheme's £16 billion transaction in June which was the largest deal of its kind.

Longevity Direct is ideally suited to longevity-hedging transactions where a single reinsurer can take on the whole liability, covering between £1 billion and £3 billion of liabilities. The greater simplicity of the cell structure means that transactions can be completed in a much shorter space of time, further reducing the set-up costs for pension schemes.

Mr Ashton added: "The pensions-derisking market, in particular longevity-hedging deals, is set to continue growing next year. While we may not see mega-deals like the BT Pension Scheme deal, the efficiency, affordability and relative simplicity which Longevity Direct offers is likely to prove very appealing for many pension schemes which have been waiting for the right opportunity."

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