BT Pension Scheme, London, has entered into the largest longevity risk transfer deal, covering £16 billion ($27.4 billion) of liabilities in an arrangement that also saw the fund set up a wholly owned insurance company, said a fund spokeswoman.
The transfer hedges more than 25% of the £40 billion pension fund's liabilities.
To facilitate the arrangement, BTPS set up a wholly owned insurance company, transferring its longevity risk to this insurer. The risk was then reinsured by U.S.-based The Prudential Insurance Co. of America.
“This is a ground-breaking deal in terms of size, structure and with one of the leading life insurance companies in the United States providing reinsurance,” said Paul Spencer, chairman of the trustee, in a news release from BTPS. “But more than this, the trustee is delighted with a transaction that significantly reduces risk and provides enhanced security for members.”
The longevity insurance policy will form part of the pension fund's investment portfolio, the release said.
Towers Watson advised the trustee on the transaction, structure and setup of the insurance company. Aon Hewitt advised BT PLC on the deal. BTPS also was advised by Allen & Overy LLP with support from Hogan Lovells.
“Reinsurers are not able to transact directly with pension funds, so (BTPS) has built that middle entity,” said Ian Aley, a senior consultant at Towers Watson who worked on the deal, in a telephone interview. “The reason they didn't go through an intermediary is that the intermediary route is somewhat restricted in the size of the transaction you could do. Consequently, as it is such a big scheme, it wouldn't have necessarily made a large enough transaction to make it material for the scheme.”
Mr. Aley said he thinks other pension funds will “do similar things, but not on this scale.”
“As pension schemes continue to focus on reaching a position of stability, there is significant demand for such large-scale capacity — and we are seeing a rapid response from the provider market with a number of new solutions available,” said Martin Bird, senior partner and head of risk settlement at Aon Hewitt, in a news release from the consultant.
