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Survey Report

Innovation in the UK de-risking markets

Chapter five of the 2021 de-risking report

Pensions Corporate Consulting|Pensions Risk Solutions|Pension Board and Trustee Consulting|Pensions Technology

By Katherine Gilder | January 19, 2021

Since our team was involved in the first buy-ins in 1999 and the first longevity swaps in 2009, the UK de-risking market has greatly developed. Katherine Gilder reflects on the evolution of the market and speculates on where we might see future innovation.

The evolution of the market

In the early years of the bulk annuity market, each transaction was necessarily bespoke given there was little by way of precedent. Over time, as insurers and advisers have gained experience, more standardised market terms have been used as a starting point for negotiations and an established practice for execution has evolved. Insurers have also needed to streamline their processes in order to reduce costs, remain competitive and keep up with the increase in demand from pension schemes.

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A reputation for innovation

  • Willis Towers Watson has a history of innovation and embracing new ideas. For example, we were the lead adviser in respect of:
    • The first collateralised buy-in
    • The first all-risks buyout
    • The first captive buy-in
    • The first buy-in for multi £100ms
    • The first software tracking system used by an insurer to track live insurer pricing
    • The first umbrella contract for repeat buy-in transactions
    • The first longevity swap
    • The first streamlined longevity swap with Legal & General
    • The first novation of a longevity swap
    • The first longevity swap using a captive, which was a Guernsey-based cell. We subsequently led the first longevity swap using a Bermudan captive
  • Our Longevity Direct offering was the first ready-made captive for pension schemes to access the longevity reinsurance market
  • 135 pension schemes and six insurers/reinsurers use Willis Towers Watson’s market-leading Postcode Mortality Tool

The other key development in the bulk annuity market in recent years has been the increase in deal size. Up until relatively recently, many schemes thought that multi-£bn buy-in and buyout deals weren’t possible and the largest schemes would need to run off. Over the last couple of years there have been several £3bn+ deals as well as the prospect of even bigger transactions.

There have been far fewer longevity swap transactions, with at most five or six swaps completing in any individual year since 2009. Initially, the cost of hedging longevity risk for smaller schemes (less than, say, £500m of liabilities) was relatively expensive, reflecting the additional risk associated with smaller populations and the lack of credible mortality experience data. This meant that the implementation of a longevity swap was only really an option for the largest pension schemes. However, the increased size and regularity of deals over the last few years, including the regular flow of deals from bulk annuity providers reinsuring their longevity risk post Solvency II, has opened up opportunities for smaller schemes to benefit from big-scheme pricing, making longevity hedging more attractive. In addition, longevity hedging contracts for smaller schemes are increasingly streamlined, meaning that contracts are much easier to put in place and run than was the case historically.

In 2017 we advised the sponsor in relation to the transition of the first longevity swap from a pension scheme to an insurer (otherwise known as a novation) as part of a bulk annuity transaction. Prior to this, many pension schemes had avoided entering into a longevity swap due to a concern that this may act as a barrier to buying out the liabilities. Since that first novation, we have seen several more, which has helped to alleviate that concern and longevity swaps are now very much seen as a stepping stone towards buy-in rather than an alternative.

Finally, over recent years we’ve seen the options available to trustees for delegating responsibility for paying benefits to members go far beyond bulk annuities. Jenny Neale highlights the progress that we have seen in relation to the regulation of superfunds in chapter one Looking back at the 2020 de-risking market in the UK and Tom Ashworth and Will Griffiths talk more about the growth of capital backed solutions in chapter eight: New kids on the block – a look at Third Party Capital Solutions.

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Case Study - The Merchant Navy Officers Pension Fund (MNOPF) novates longevity swap to £1.6bn buy-in

The MNOPF Trustee has had a well-defined journey plan for many years, with a target of securing the liabilities. This has helped the MNOPF to have a long and successful history of de-risking transactions – it has reduced risk at the right time and achieved excellent pricing from the insurance market.

The MNOPF’s de-risking journey started in 2009, when they transacted their first buy-in, and the first stage completed in 2012 when the MNOPF Trustee completed a successful buyout of the Old Section. Transactions for the remaining DB Section began in 2014 through an innovative longevity swap, the first longevity swap to use a ready-made Guernsey-based captive. Following positive investment performance, the Trustee was able to start annuitising parts of the Fund in 2017. The first step was a £490m buy-in with L&G for recent retirees, seizing particularly attractive pricing in the market at that time, followed in February 2020 by the Trustee purchasing a buy-in policy with Pension Insurance Corporation (PIC) for the pensioners and dependants covered by the longevity swap they had put in place in 2014.

The buy-in in 2020 was notable for several reasons – including being one of the largest bulk annuities of 2020. Two features particularly stand out though:

  • Efficiency of novation As part of the transaction, the ownership of the longevity swap was novated from the Trustee to PIC. The combination of (1) anticipating that a buy-in would be undertaken within the 2014 longevity swap documentation; and (2) the use of a Guernsey-based captive insurer to intermediate the original longevity swap, meant the novation process was very streamlined – in fact it only took a few weeks from agreeing to proceed with PIC.
  • Pricing achieved Because the Trustee had already hedged longevity risk, this fed through to significantly improved buy-in pricing. In fact it was some of the best buy-in pricing we have ever seen and improved the Fund’s funding level by over 3%. Achieving this pricing did require discipline from the Trustee though – the Trustee knew that their deal, with its existing longevity swap, would be very attractive to the insurance market and used this knowledge, working with Willis Towers Watson, to set a stretching price target. The Trustee then monitored the market until PIC were able to meet the target price – whilst the Trustee did receive other offers in the meantime, they waited until the right deal emerged.

What our client told us:

“It was very important to the Trustee that our longevity swap deal was flexible, future-proof and capable of being converted to a buy-in if needed. The work put in by Shelly Beard and the team at Willis Towers Watson and our other advisers in 2014 has now paid off. This buy-in enables us to more effectively manage the risks faced by the fund as a whole and provides greater certainty to members that their benefits will continue to be paid in full from the Fund.”

Rory Murphy, Trustee Chair of MNOPF

So, what’s next?

It’s clear that there has been significant evolution in the de-risking markets since their inception and they are likely to continue to evolve to meet the changing needs of pension schemes. In the future, we may see innovation from:

  • Something entirely new - For example, the first transaction from a superfund. Following the Pensions Regulator’s guidance in June setting out how it will oversee superfunds until a permanent regulatory regime is legislated for, we expect that the first two superfunds that have launched, Clara Pensions and The Pension Superfund will now seek authorisation and complete their first transactions possibly in early 2021. Whilst a superfund won’t be suitable for all pension schemes, for some it will allow members’ benefits to continue to be paid in full with the additional protection of the capital invested.
  • The adoption of an approach already trialled by another sector - For example using funded reinsurance, whereby both the longevity and asset risks associated with defined benefit pensions is transferred to a reinsurer but with more capital efficiency than a buy-in due to there not being an upfront premium.
    In addition, in the past, when schemes have considered the market options for hedging deferred longevity risk they have typically found the cost and the additional complexity of hedging benefits that are uncertain in size and timings (due to member options) relatively unattractive and decided to focus on hedging pensioner longevity risk. More recently, we have seen the longevity reinsurance market to be more competitive for deferred liabilities, and have worked through a number of structures for dealing with the timing uncertainties. We have also seen that as funding positions have improved, and schemes are looking to adopt a fully cashflow matching investment strategy, there is more appetite from trustees to hedge non-pensioner longevity risk, particularly where a large proportion of the risk in relation to pensioners has already been removed. We therefore expect the first non-pensioner longevity swap to complete in the short-term.


The market has evolved significantly from the early buy-in and longevity swap transactions. With increasing demand from pension schemes, and a competitive marketplace, it is certainly likely to continue to develop. I’m looking forward with interest at how all market participants respond to meet changing needs and the creative solutions that are developed.

Next chapter - Pension scheme surplus on buyout


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