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The Actuary The magazine of the Institute & Faculty of Actuaries
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Babcock and Credit Suisse in UK’s first longevity swap

The first longevity swap in the UK has been agreed between Babcock International and Credit Suisse, although it is not yet completed. The swap provides a hedge for liabilities associated with current pensioners, accounting for about £750m of current liabilities, or 45% of total scheme liabilities.

Acting as adviser to Babcock, investment consultants Watson Wyatt said it was advising 10 other companies on similar deals. In a statement to the Financial Times, Watson Wyatt consultant Nick Horsfall said the longevity swaps market “has the potential to grow to between £2.5bn and £5bn” in the next year.

A key attraction is that no large initial cash outlay is required in using a swap structure to reduce longevity risk. Falling gilt yields have pushed the cost of the buyout option higher for cash-strapped schemes, and it is widely expected that the longevity swap will be the de-risking tool of choice for larger schemes over the next year.

However, not all consultants are as bullish. The significant counterparty risk is cited by many as one of the pitfalls of these products, along with the subsequent restrictions on scheme funding and accounting treatment.