Merchant Navy Officers Pension Fund, Surrey, England, hedged £1.5 billion ($2.3 billion) of longevity risk with Pacific Life Re, said Andrew Waring, CEO of the pension fund.
To make the transaction more cost efficient, the £2.5 billion pension fund worked with consultant Towers Watson and its “longevity direct” offering, to create a Guernsey company, MNOPF IC Ltd., to act as intermediary.
The deal relates to the pension fund's New Section defined benefit plan. It closed its Old Section in 1978, and completed a £1.3 billion pension buyout for that section in July.
Mr. Waring said in a telephone interview that the £1.5 billion deal hedges about 55% of the pension fund's total £2.8 billion of liabilities, and covers all 16,000 retired members.
It is not dissimilar, Mr. Waring said, to a deal by the £40 billion BT Pension Scheme, London, which set up a wholly owned insurance company prior to completing a longevity risk transfer with U.S.-based Prudential Insurance Co. of America, in July.
“The difference is that this is a scheme with a much smaller size. MNOPF IC acts as an intermediary, a pass-through to the reinsurer. It is much more capital efficient. MNOPF passed the risk to MNOPF IC,” which then reinsured the risk with Pacific Life Re. “It opens up the insurance cell opportunity to other schemes of a similar size to us,” Mr. Waring said. Bypassing a third-party intermediary in the transaction, such as a bank, is more cost effective, he said.
Mr. Waring said the pension fund began work on hedging its longevity about 15 months ago. Towers Watson is the pension fund's outsourced CIO. The pension fund searched for a reinsurer in July, and the deal completed within “a couple of months.”
The remaining liabilities for the pension fund cover about 700 active members of the pension fund, and the former employees that have not yet retired. “At some point in the future, we can reinsure more of those deferred members as they become pensioners. About £100 million of new pensioner liabilities emerge (for us) per year,” Mr. Waring said.
Towers Watson acted as actuarial, investment and settlement advisers. “This transaction is an important development for the MNOPF and for the longevity hedging market in general,” said Shelly Beard, senior consultant at Towers Watson, in a news release from MNOPF.
Norton Rose Fulbright provided legal advice.
