Mercer, a subsidiary of Marsh McLennan, has successfully finalized a significant longevity hedge, marking a milestone in risk reduction for the MMC UK Pension Fund. This groundbreaking hedge, valued at approximately £2bn, extends longevity risk transfer to encompass over 14,500 pensioner, deferred, and active defined benefit (DB) members.
Details of the Longevity Hedge
The longevity hedge implemented by Mercer covers a significant amount, approximately £2bn, across different categories of members within the MMC UK Pension Fund. This includes pensioner, deferred, and active defined benefit members, providing comprehensive protection against the financial implications of increasing life expectancy.
Innovation in Longevity Risk Transfer
What sets this longevity hedge apart from others is its innovative inclusion of active members. This represents a substantial extension in longevity risk transfer, amounting to around £2bn. By including active members in the hedge, the fund effectively manages the long-term exposure to improvements in longevity.
Significance of the Arrangement
Notably, this longevity hedge marks a milestone as the second-largest UK pension fund swap to cover more non-pensioner members than pensioners. By adequately covering both non-pensioner and pensioner members, the fund mitigates the risk associated with increased life expectancy and ensures the overall stability and sustainability of the pension scheme.
Longevity Risk Coverage Mechanism
The longevity risk coverage was facilitated through a ‘captive’ Guernsey insurance cell, providing a robust and efficient mechanism for risk transfer. Concurrently, the hedge was reinsured with Munich Re, a leading global reinsurer, further enhancing the fund’s risk protection.
Previous Longevity Swaps by the Fund
Building upon previous risk management initiatives, this significant transaction follows the fund’s earlier £3.4bn pensioner longevity swaps in 2017. These swaps provided coverage for the longevity risk of defined benefit sections, leveraging partnerships with two other global reinsurers.
Importance of the Recent Hedge
This groundbreaking longevity hedge represents a crucial step in risk mitigation for the MMC UK Pension Fund. By insuring almost all of the DB sections’ longevity risk, the fund significantly reduces the adverse financial impact that extended life expectancy can have on pension liabilities.
Implementation of the Longevity Captive Solution
The innovative longevity hedge employed the use of a Guernsey-based incorporated cell company named Mercer ICC Limited, managed by Marsh Captive Solutions Guernsey. This captive solution provided a flexible and customized approach to managing longevity risk, tailored to the unique requirements of the fund.
Trustee’s Perspective
Bruce Rigby, Trustee Chairman, emphasizes the addition of a longevity hedge as a natural next step in reducing risk within the fund. By implementing strategic risk management measures, the trustee aims to enhance the security and stability of members’ pension benefits.
Comment From the Lead Transaction Adviser
Suthan Rajagopalan, lead transaction adviser for the trustee and Head of Longevity Reinsurance at Mercer, highlights the distinctiveness of this transaction. By covering the longevity risk of active members, and with over 75% of the longevity hedge comprised of non-pensioners, the fund effectively manages its long-term exposure to improvements in longevity.
The successful finalization of the £2bn longevity hedge by Mercer represents a significant milestone in risk reduction for the MMC UK Pension Fund. This groundbreaking hedge, which includes coverage for active members, demonstrates Mercer’s commitment to innovative solutions and comprehensive risk management strategies. With the implementation of this longevity hedge, the fund effectively insures against the financial implications of increasing life expectancy and ensures long-term sustainability for its pension scheme.