BAE Systems' U.K. pension fund offloads £3.2 billion in longevity risk

A BAE Eurofighter

BAE Systems 2000 Pension Plan, Farnborough, England, completed one of the largest longevity swaps transactions in the U.K. to date with Legal & General to insure about £3.2 billion ($4.9 billion) of liabilities, according to Richard King, L&G spokesman.

The deal covers current retired members of the £3.4 billion pension fund, which was launched following the merger of British Aerospace PLC and Marconi Electronic Systems in 1999.

The arrangement “will reduce the funding volatility relating to increasing life expectancy,” according to BAE Systems' annual report issued Thursday. (The liabilities valued were measured using the London interbank offered rate swap curve.)

Legal & General will retain about 30% of the longevity risk, with the remainder reinsured by Hannover Re Group. Aon Hewitt advised BAE Systems and the pension fund's trustees.

The value of the liabilities insured for the BAE Systems transaction alone is equal to the amount recorded in the U.K. in all of 2012, when about £3.2 billion of liabilities were insured against longevity risks in three separate deals, according to data from Aon Hewitt.

“This transaction, along with others in the pipeline, demonstrates the capacity and appetite of the global reinsurance market to take on pension longevity risk,” according to Martin Bird, partner and head of risk settlement at Aon Hewitt.

U.K. pension fund longevity swap deals to date
Amounts are in millions of pounds sterling.
DateFundProviderEstimated sizeSolution
February 2013BAE SystemsLegal & General3,200Pensioner bespoke longevity swap
December 2012LV=Swiss Re800Pensioner and all members over age 55
May 2012Akzo NobelSwiss Re1,400Pensioner bespoke longevity swap
January 2012PilkingtonLegal & General1,000Pensioner bespoke longevity swap
December 2011British AirwaysGoldman Sachs / Rothesay Life1,300Pensioner bespoke longevity swap
November 2011Rolls-RoyceDeutsche Bank3,000Pensioner bespoke longevity swap
August 2011ITVCredit Suisse1,700Pensioner bespoke longevity swap
February 2011PallJ P Morgan70Non-pensioners index based longevity hedge
July 2010British AirwaysGoldman Sachs / Rothesay Life1,300Synthetic buy-in (longevity swap plus asset swap)
February 2010BMWAbbey Life / Deutsche Bank3,000Pensioner bespoke longevity swap
November 2009Royal BerkshireSwiss Re1,000Pensioner bespoke longevity swap
July 2009RSA Insurance groupGoldman Sachs / Rothesay Life1,900Synthetic buy-in (longevity swap plus asset swap)
May 2009BabcockCredit Suisse1,500Pensioner bespoke longevity swap (three schemes)
Source: Aon Hewitt