Captive ‘strategy of choice’ for huge pension schemes to hedge longevity risk, says Prudential Insurance expert

A multi-billion dollar captive longevity reinsurance transaction (LRT) has been used to transfer risk linked to huge pension liabilities, suggesting a growing trend for this type of derisking deal.

The HSBC Bank (UK) Pension Scheme agreed the deal with The Prudential Insurance Company of America (PICA), a subsidiary of Prudential Financial Inc (PFI), to transfer longevity risk associated with £7 billion ($8.7 billion) of pensioner liabilities.

The companies involved said this LRT was “second only in size” to a $27.7 billion transaction PICA completed with the British Telecom Pension Scheme in 2014 and that the move signals a growing trend of large pension schemes using captives in these deals.

This deal covers half of the HSBC scheme’s pensioner liabilities and offers long-term protection if the pensioners or their dependents live longer than initially expected.

It is structured as an insurance contract with an HSBC-owned captive insurer in Bermuda, which reinsured the longevity risk to PICA.

PFI explained that creating a company-owned captive insurer allows the pension scheme to efficiently access the deep and liquid longevity reinsurance market. This is the first time that a pension scheme associated with a major bank has entered into such a transaction.

Amy Kessler, PICA’s head of LRT, said: “While HSBC is the latest pension scheme to take advantage of the captive solution, developed in 2014 for our landmark transaction with British Telecom, we have reached a pivotal moment. The captive approach has become the strategy of choice for large pension schemes seeking to hedge longevity risk.

“The HSBC transaction demonstrates the level of credibility and success captive longevity risk transfer transactions enjoy in the current market.”

PICA has completed around $75 billion in international longevity reinsurance transactions since 2011.

David Lang, PICA’s transaction lead for the agreement, said: “Market demand for the certainty that comes with pension and longevity risk transfer has increased as Brexit nears.

“The UK is experiencing the greatest level of pension de-risking activity in history and we are proud to support this growing market with our capital, our capacity and our experience in helping pension schemes enhance retirement security for their members.”

James Calladine, chief risk officer at HSBC UK Bank , said: “This transaction marks another sensible and positive step on the scheme’s derisking journey, with terms that make financial sense for both the trustee and for the scheme’s sponsor, HSBC UK Bank.”

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