Connected Research

Union policy research in the 21st century

Deal on exposure to pensioner longevity at Babcock

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Engineering company Babcock International has come up with an innovative way of limiting its exposure to pensioners living longer – it is, essentially, taking out an insurance policy against it.

In conjunction with Credit Suisse Bank, Babcock is in the process of concluding a ‘longevity swap’ for two of its pension schemes under which Babcock will be compensated should pensioners live longer than envisaged under the agreement; if they live for less, Credit Suisse gains the benefits. The deal – which will, once concluded, last for 50 years – covers current pensioners only, as well as their spouses and dependants, the liabilities in respect of whom cover some 45% of the schemes’ total liabilities.

The deal thus draws something of a line against the schemes’ exposure to pensioners living longer, at the price of losing benefits should mortality statistics turn in the other direction. The deal is particularly interesting in the light of efforts last year by the Pensions Regulator to press schemes to adopt more realistic mortality assumptions the effect of which will be to increase the liabilities facing schemes (the Regulator also has said that, in the current environment, schemes should not abdandon the need for realistic assumptions but that the regulatory framework was flexible enough to cope with the impact of the downturn).

Nevertheless, it is clear that the mortality rates of current pensioners are reasonably predictable – and, consequently, relatively uncontroversial; much less so are the mortality rates of 40 year olds – which are presumably uninsurable in this same way. There is no information as to the cost of the deal.

The notion of ‘longevity swaps’ appears to be something of a half-way house between the current situation and the full buy-out model, under which companies outsource their pension schemes to third parties. This has been in steep decline in the current economic circumstances, deals falling by half during the first quarter. According to the Pensions Regulator, buy-out deals reached £8.2bn in the year to end-September 2008, six times the level of the previous year, but still were worth just 1% of pension scheme liabilities.

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Written by Calvin

21/05/2009 at 6:41 pm

Posted in Pensions

Tagged with ,

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