Mercer completes £3.4bn longevity risk transfer for MMC’s UK pension fund

The largest longevity risk transfer for a UK pension fund since 2014 has been completed in Guernsey by Mercer, a wholly owned subsidiary of Marsh & McLennan Companies (MMC). The longevity hedge has been completed covering about £3.4bn of liabilities for some 7,500 pensioner members of the MMC UK Pension Fund. The longevity risk was transferred, without the payment of an upfront premium, using a captive approach to the reinsurance market through Guernsey incorporated cells, with Canada Life Reinsurance and The Prudential Insurance Company of America (PICA) ultimately reinsuring an equal share of the risk. MMC UK Pension Fund trustee chairman, Bruce Rigby, said: “Rising life expectancy has led to significant increases in UK pension scheme liabilities over the past couple of decades. The trustee commissioned a full market review of all longevity risk transfer structuring approaches and corresponding providers. Based on a combination of factors such as cost, efficiency, future flexibility and security, the trustee selected the ‘Mercer Marsh’ longevity captive solution. By implementing this longevity hedge in partnership with MMC and its advisers, the fund has taken a major step in removing this risk.” The ‘Mercer Marsh’ longevity captive solution uses Guernsey-based incorporated cell company (ICC) Mercer ICC Limited, managed by Marsh Captive Solutions Guernsey, to offer ICCs to pension funds looking to transfer longevity risk efficiently to the reinsurance market. This transaction utilised two incorporated cells – Fission Alpha IC Limited and Fission Beta IC Limited – to transfer risk to Canada Life Re and PICA. The transaction will provide long-term protection and income to the fund in the event that the covered participants live longer than expected. It also lowers the risk that MMC will face unexpected pension contributions due to an increase in pensioner life expectancy. Suthan Rajagopalan, lead transaction adviser for the trustee and head of longevity reinsurance at Mercer, said: “Mercer is delighted to have helped the fund manage its longevity risk in this way. We worked closely with the trustee to achieve a successful outcome for all parties and further help the fund to continue its de-risking journey.” He went on: “Longevity risk is a key risk for defined benefit schemes and is more significant than ever in the historically low-yield environment. As part of this transaction, we have advised on and managed a broad and highly competitive process to remove this long-term risk, and have been able to facilitate the transfer of risk to the reinsurance market cost-effectively through the ‘Mercer Marsh’ longevity captive solution.” The transaction is PICA’s second reinsurance agreement using a captive structure. The first was the record £16bn longevity risk transfer transaction with the British Telecom Pension Scheme in 2014. “The MMC UK Pension Fund transaction reflects the fact that de-risking is the new normal,” said Amy Kessler, head of longevity risk transfer at Prudential. “In every industry peer group, companies are choosing to reduce the longevity risk embedded in their pensions through buyins, buyouts and longevity hedging. Today, a full range of solutions exist to help secure pension promises and reduce risk to funding levels. There remains a great deal of uncertainty with regard to future longevity improvements. Pension plans that decide to keep their longevity risk rather than hedge it are maintaining a risky strategy. The timing may be particularly good for non-UK sponsors to accelerate their de-risking plans to take advantage of comparatively low sterling exchange rates.” William McCloskey, head of international longevity transactions at Prudential, said: “This significant transaction highlights the importance of the captive solution in longevity risk transfer and proves the captive remains an important option for trustees to efficiently and cost-effectively transfer longevity risk in the manner that works the best for them.”

Mercer completes £3.4bn longevity risk transfer for MMC’s UK pension fund

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