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The Actuary The magazine of the Institute & Faculty of Actuaries

Lloyds pension schemes agree £10bn longevity swap

The UK's second-largest longevity swap ever has been completed after Lloyds Banking Group Pensions Trustees Limited agreed a £10bn transaction with Pacific Life Re today.

Lloyds agrees risk swap ©Shutterstock
Lloyds agrees risk swap ©Shutterstock

The deal is structured as an insurance policy with Scottish Widows Limited acting as the insurer, and Pacific Life Re the reinsurer. 

The policy will protect three Lloyds pension schemes from the financial risk of an unexpected increase in life expectancy, making them more secure for members.

This comes amid favourable market conditions, with a £7bn deal involving HSBC's UK pension scheme completed less than six months ago.

Andy McAleese, Pacific Life Re's head of longevity, said: "There have been record volumes of pension risk transfer in 2019 and we are continuing to see very strong demand carrying over into 2020.

"This milestone arrangement demonstrates that longevity swaps continue to be an important risk transfer tool for pension schemes.”

Willis Towers Watson (WTW), which acted as a lead adviser on the deal, said that it expects the longevity swap market to record total deals worth in excess of £25bn this year.

The top 10 largest deals ever recorded in the UK are shown below:

Source: WTW
Source: WTW

WTW said scheme funding levels have trended upwards due to positive asset returns alongside longevity gains, creating favourable market terms, and that there is pent up demand from schemes unable to transact by the end of 2019.

The firm also revealed that an increased number of schemes are recognising the potential benefit of staging their de-risking.

They are addressing individual risks as and when markets are considered attractive, rather than targeting a one-off buyout transaction and being at risk that the various price components move against them.

Ian Aley, WTW's head of transactions, commented: “The longevity swap market is currently showing a huge amount of demand from pension schemes, and reinsurers like Pacific Life Re are rising to the challenge through both innovation and record-breaking transaction sizes, as well as efficient execution."

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