Hymans Robertson, the leading pensions, benefits and risk consultancy, acted as actuarial adviser to the trustee of the ScottishPower Pension Scheme on a longevity swap, announced today.

The deal covers almost £2bn of pensioner liabilities and removes longevity risk from 50% of the scheme liabilities.  It transfers the risk of almost 9,000 scheme members living longer than expected to three different reinsurers. The deal was transacted by Abbey Life.

Commenting, Martin Potter, Partner at Hymans Robertson, said:

Life expectancy has risen dramatically in recent years, increasing the cost of pension provision. But the pace of future increases remains uncertain. At this point, longevity was the right thing for the trustee to focus on – there was a clear strategic rationale for doing so and the pricing was attractive. This deal removes the risks associated with that uncertainty for the ScottishPower Pension Scheme, and goes some way towards de-risking it. Longevity is one of the most important assumptions for schemes because it affects many aspects of day to day management – from estimates of liabilities at a triennial valuation through to using valuation cashflows to set LDI-like strategies and modifying benefit structures. The uncertainty attached to it has far-reaching consequences. Ultimately, the decision that pension schemes make on the removal of risk - perhaps via longevity swap or buy-in/out - is highly dependent on their view of how longevity will change in the future.

Research we undertook in conjunction with the NAPF last year illustrates the extent of uncertainty trustees face with regards to improvements in longevity. A key finding was that DB pensioners experience different trends in longevity to the population as a whole.  Added to that, the pace of longevity increases varies significantly for different groups of members within DB schemes.  We now have a much greater understanding of this thanks to this research.  In just the same way that our Club Vita analysis of current day longevity was invaluable in our efforts to help the ScottishPower trustees understand and interrogate the pricing of the swap, so this latest research will help inform further pricing assessments.

Commenting, Peter Thompson of BESTrustees plc, Chair of ScottishPower Pension Scheme Trustee, said:

The trustee is pleased to have taken another important step in our ongoing process to improve further the level of security of all our members' benefits. This deal reduces risk to the pension scheme, providing increased certainty to our sponsoring company, and most importantly, increased security to our scheme members.

Commenting on the pension risk transfer market, James Mullins, Partner and Head of Risk Transfer Solutions, added:

We believe the spotlight will once again be shone on the pension risk transfer market this year. We expect to see an upswing in all forms of risk transfer - including longevity swaps, buy-ins and buy-outs – as increasing numbers of trustees and scheme sponsors work together to minimise risk and maximise pension security for members. This deal is illustrative of the excellent value that the market for longevity swaps represents at the moment. This is being driven by high reinsurer appetite for UK longevity risk. It’s therefore highly likely we’ll see an increasing number of schemes go down this route, taking them a step closer to securing benefits. There are many different structural solutions available to schemes and so it’s critical to consider all options and obtain impartial advice.