News & analysis
HSBC captivated by £7bn longevity deal UK scheme de-risking reaches 12-month record
HSBC’s UK pension scheme has closed a £7bn longevity risk transfer deal with a Prudential subsidiary, the second largest de-risking deal in the UK, highlighting growing demand to hedge longevity risks through a captive approach.
The deal, which insures half of HSBC’s scheme liabilities, consists of an insur- ance contract with the bank’s Bermuda subsidiary, which in turn reinsures the longevity risk to the Prudential Insurance Company of America (PICA), a sub- sidiary of Prudential Financial. Captive approaches to longevity risk differ from buy-in or buy-out deals by allowing pension schemes to use their own insurance business and then access the reinsurer directly, rather than an outright transfer of liabilities in the form of a buy-out. Amy Kessler, PICA’s head of longevity risk transfer, said that the captive approach has become the strategy of choice for large pension schemes. “The HSBC transaction demonstrates the level of credibility and success captive longevity risk transfer transactions enjoy in the current market,” she added. In a statement to its scheme members, HSBC highlighted that its Bermuda subsidiary had been chosen to access the bank’s existing insurance infrastruc- ture and achieve better value for members while not affecting the tax position of the scheme.
Other examples of schemes pursuing a captive approach to longevity risk transfers include the British Airways Pension Scheme, which completed a similar transaction through a Guernsey-based contract last year, and the pen- sion fund for Marsh & McLennan, the parent of Mercer, which covered £3.5bn in liabilities through an insurance subsidiary in Guernsey. Last year there was a sharp increase in bulk annuity transactions, where UK schemes closed some £20bn in buy-in and buy-out deals. The UK’s largest longevity risk transfer deal was signed in 2014 by the BT Pension Scheme, which completed a $27.7bn (£22.8bn) reinsurance deal with PICA.
Buy-in and buy-out deals by UK pension schemes reached £17.6bn in the first half of the year, a massive leap from the £7.8bn recorded in the same period a year ago, Lane Clark & Peacock (LCP) has revealed. This means that in the 12 months to the end of June, the market is worth £34bn. This makes it the busiest year on record, more than doubling the £14.9bn trans- acted in the previous year. The £4.6bn buy-out by Rolls Royce in June, the £4.4bn buy-in by British Airways in September 2018 and the £3.4bn buy-in by British American Tobacco in May helped drive this record year. The schemes of Marks & Spen- cer and Commerzbank also completed £1bn-plus deals in the first half of the year.
Almost three quarters (70%) of volume in the six months to the end of June was covered by Legal & Gen- eral and Pension Insurance Corporation (PIC), which wrote £6.3bn and £6bn of business, respectively. This gives Legal & General 36% of the market, just ahead of PIC, which has 34%. LCP partner Charlie Finch said activity continues at a frenetic pace. “Insurer pricing has held up well and we continue to expect 2019 full year buy-in and buy-out volumes to exceed £30bn as large transactions compete for market capacity in the second half of the year.”
Medicash shows that DB consolidation is picking up the pace
Healthcare cash plan provider Medicash has transferred its £20m DB scheme to TPT Retirement Solutions Master Trust in another sign that smaller DB schemes are consolidating their assets. By transferring the assets of its 174 mem- bers into the £9bn TPT master trust, Medi- cash aims to gain access to a broader range of investment assets, reduce running costs and improve the security of members benefits.
The company follows the initiative of other smaller schemes with assets of less than £1bn who have chosen to transfer their assets into a larger DB master trust.
The drive to consolidate has picked up the pace since last years’ publication of the Department for Work and Pensions’ DB pension scheme whitepaper, which high- lighted
the persistent fragmentation of
final salary schemes. Medicash’s chief executive, Sue Weir, pre- dicts that other DB schemes may follow her lead and undergo this type of consolida- tion. “The benefits of a DB master trust can be attractive for schemes with less than £1bn under management,” she said. According to the Pension Protection Fund’s (PPFs) 2018 Purple Book, there are almost 2,000 schemes in the UK with fewer than
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100 members. Yet the PPF also highlights that these small schemes tend to have the highest aggregate funding levels of 102.5% on average, compared to 92.7% for schemes with up to 5,000 members.
Aggregate funding shortfalls therefore appear to be most pressing for medium- sized schemes, which account for an even larger share of the UK’s DB market. The UK has more than 3,000 medium-sized DB schemes with less than 5,000 scheme members. The Pensions Regulator (TPR) added three new master trusts to its list of authorised providers, bringing the total number to 15.
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