28 July 2020
The Trustee of the LV= Employee Pension Scheme, working closely with its corporate sponsor, Liverpool Victoria Financial Services Ltd, (‘LV=’), has converted a longevity swap held with ReAssure (reinsured by Swiss Re) into a c.£800m buy-in with Phoenix Life. This represents a significant de-risking step for the pension scheme and reduces volatility in the amount of capital that LV= is required to hold (as a regulated financial institution) in respect of DB pension scheme funding risks.
The Trustee entered into the longevity swap in 2012 and, following the conversion to buy-in, Swiss Re will continue to cover the longevity risk by providing reinsurance to Phoenix Life. As with a conventionally-executed buy-in, the Trustee will receive cash flows that match the benefits due to those members who had been covered by the longevity swap, thereby removing market as well as longevity and other demographic risks associated with paying pensions to those members.
The conversion of the longevity swap allowed the Trustee to capture attractive buy-in pricing, benefitting from the asset-sourcing expertise of Phoenix Life, a UK-regulated life insurer. The buy-in policy is an asset of the scheme that substantially matches the liabilities insured (about half of the overall scheme), regardless of the basis on which those liabilities are measured, whether the corporate sponsor’s IAS19 basis, Trustee’s funding basis or other. This conversion therefore reduces volatility in the amount of capital held by LV= in respect of DB pension scheme funding risks.
LCP advised both the Trustee and corporate sponsor on the conversion of the longevity swap into the buy-in. CMS were appointed as transaction legal counsel and provided specialist legal advice to the Trustee. Redington provided investment advice to the Trustee on the asset transfer and rebalancing of the residual portfolio. Phoenix Life was advised by Eversheds Sutherland.
This transaction is part of a growing trend of pension schemes converting longevity swaps into buy-ins. Since the conversion of the British Airways longevity swap in 2018, there have been at least eight longevity swaps converted into buy-ins. This implies that one in five of all publicly-announced longevity swaps have now been converted into buy-ins.
Huw Evans, Chair of the LV= Employee Pension Scheme and a Director of BESTrustees Limited, commented: “This conversion is an important step in improving the security of all scheme member benefits as it removes substantial asset and market-related risks as well as longevity and other demographic risks associated with a significant group of members. Our advisers, LCP, CMS and Redington worked collaboratively to run an efficient process, attracting insurer interest in a busy market and driving the project to a successful conclusion.”
Emily Penn, Capital and Investment Director at LV= commented: “At no additional cost to LV=, we have reduced capital volatility through the conversion of the scheme’s longevity swap to a buy-in. In doing so, this transaction has made a substantial contribution to the stability and quality of LV=’s capital surplus and reduce overall pension scheme risk. Phoenix Life held an attractive price in volatile markets following the outbreak of Covid-19, giving us confidence to proceed through a number of complex steps to achieve a successful result.”
Justin Grainger, Head of Bulk Purchase Annuities at Phoenix Life commented: “We are delighted to support the Trustee in securing members’ benefits through the largest external buy-in written by Phoenix Life to date. Throughout the process the Trustee and LV= were very clear about what they wanted to achieve. This enabled us to apply our structuring and risk management expertise to tailor a solution that best met those requirements, resulting in the efficient completion of a relatively complex transaction despite the backdrop of market disruption”.
Myles Pink, Partner at LCP commented: “In order to design and manage the optimal process for achieving best price and terms for the Trustee and LV=, we combined our detailed understanding of insurance and reinsurance pricing, structuring expertise in buy-ins and longevity swaps, and leveraged our market relationships. Conversions of longevity swaps into buy-ins are becoming increasingly common as pension schemes’ asset strategies mature, they decide to capture attractive buy-in pricing and better position themselves for full buy-out. There are tips to be considered and pitfalls to avoid in ensuring the conversion is cost-effective.”
James Parker, Pensions Partner at CMS commented: “Our Pensions De-risking Team has now advised on five of the longevity swap conversions that have taken place to date. Central to the success of this transaction was drawing on our experience to ensure all key legal and structuring terms were fully understood and priced-in by the buy-in providers during the competitive phase of the process. We were therefore able to work with BESTrustees, LCP and Redington to implement a highly efficient execution process for the buy-in contract.”
Carolyn Schuster-Woldan, MD at Redington commented: “It's great to have worked collaboratively with the Trustee's other advisers during all stages of the transaction to achieve this important de-risking step and improve the overall security of member benefits. The price lock portfolio proved robust in volatile markets, and there were particular challenges with the transfer of bespoke derivative contracts and assets. Our previous experience with similar transactions proved invaluable in helping the Trustee fairly assess each insurer’s offer, keep transaction costs to a remarkably low level and to ultimately achieve an investment portfolio that is on track for the next stage of the journey.”
Daniel Harrison, Global Head Longevity Solutions at Swiss Re commented: "We are delighted to have been able to work with the Trustee and its advisors throughout the planning and execution of this transaction. We are able to provide continuity of longevity risk protection from the original longevity swap in 2012 to the new reinsurance coverage with Phoenix Life. Our expertise and clear understanding of the requirements of all parties facilitated the efficient completion of this transaction."
The buy-in covers all c.4,100 pensioners and c.200 deferred members currently alive and covered by the longevity swap. LCP have summarised in the following table those longevity swaps that have been converted into buy-ins. More detail on longevity swaps and the buy-in market can be found in LCP’s latest De-risking report.
|Longevity swaps made||Longevity swap conversions to buy-in|
* 3 swaps for one pension plan grouped as 1
Longevity swap conversions include those by the pension schemes of SSE, British Airways, Rolls Royce, Allied Irish Banks and the Merchant Navy Officers Pension Fund