The British Airways Pension Scheme's recent captive insurance based longevity transaction highlights a growing appetite for such structures in the UK DB market. Many larger schemes are looking to exploit the currently favourable pricing environment by dis-intermediating the market and building life insurance regulated structures of their own - through which access to the reinsurance markets can be facilitated.
2014's ground-breaking structure between the British Telecom Pension Scheme (BTPS) and Prudential Financial of the US marked the beginning of this trend, re-insuring as it did £16 billion in liabilities, in a deal which hedged a quarter of the schemes (not inconsiderable) longevity risk. BT established its own captive insurer, a Guernsey-based incorporated cell company (ICC), which granted access to the reinsurance market directly, avoiding the need for a bank or insurer to sit between the counterparties. ICC structures are frequently arranged so that a core, capital intensive structure is created, with satelite 'cells' which can be employed should market conditions dictate at relatively short notice - thus allowing a scheme to de-risk over time as it continues to mature.
BA's recent transaction is said to represent one of a number of similar transactions forecast for the remainder of 2017...
British Airways’ Airways Pension Scheme (APS) used a “captive insurer” to hedge £1.6bn (€1.8bn) of liabilities against increases in member longevity. In a letter to members, APS’ trustee board said it had established its own insurance company based in Guernsey earlier this year to take on the risk, which was then reinsured by Partner Re and Canada Life Re. The £7bn scheme previously hedged roughly £2.6bn of liabilities through two longevity swap transactions backed by Rothesay Life, completed in 2010 and 2011. However, the trustees said “favourable pricing” had allowed them to bypass this step and deal directly with the reinsurers.