Akzo Nobel has entered into a £1.4 billion longevity insurance contract to make its future pension costs more predictable.
The agreement between the Azko Nobel (CPS) Pension Scheme and Swiss Re differs from most longevity hedging contracts. Swiss Re will retain the risk on its balance sheet, rather than pass it on to another insurer or to the capital markets.
Towers Watson, which advised on the transaction, said it expects the longevity hedge to be the first of several agreements between UK pension schemes and providers of longevity-risk hedging solutions during 2012.
Longevity hedges are based on how many people are alive and receiving benefits at each point in the future. This means there can be a long lag between developments that are expected to affect people’s longevity and the payments that result.
Sadie Hayes, senior consultant at Towers Watson, said: “Today’s [May 24] transaction takes the number of employers whose pension schemes have hedged longevity risk without buying conventional bulk annuities into double figures.
“Some providers have recently dropped out of the market, but there is plenty of appetite from pension schemes that have been stung by changes to life expectancy in the past and want to protect themselves against this happening again.
“Cutting out the middle man and dealing directly with the reinsurer was the right thing for AkzoNobel, based on the proposal that Swiss Re put on the table. To take advantage of pricing opportunities, pension schemes need to be plugged into a range of providers’ latest thinking.”
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