Unlike its bet on the underlying liabilities, the longevity swaps industry lives on.
ITV on Monday announced it had agreed to a £1.7bn swap deal with Credit Suisse whereby the firm will pay the bank monthly fees to take on the obligation for paying its employees’ pensions.
As the Artemis blog notes, the deal applies immediately, involves 12,000 ITV fund members, and represents the third largest UK longevity swap deal to date.
“The impact of the swaps on the overall Scheme deficit is an increase of around £50m on both the accounting and funding basis. This equates to around a one year change in life expectancy,” says ITV.
ITV’s pension deficit last year was £312m, according to Dow Jones, and therefore £50m looks a sizeable chunk to pay for the risk transfer. But if it really only equates to an additional year in life expectancy that could well be a good price to pay for the security. The market is so thin — deals are mostly bespoke (though some are indexed) — and there’s no benchmark, which makes it hard to judge.
It’s a boon for an industry that’s been quiet for a few years despite worries about pension liabilities and demographic pressures.
Indeed, this deal got us wondering whether it will lead to a resurgence in interest from public sector pension funds, in both the UK and the US. The Royal County of Berkshire was the first and only public sector fund to enter a deal, back in 2009.
On one hand, the security could benefit local governments, allowing them to make better decisions about future investments, especially when budgets are being cut.
On the other hand, the mix of munis and swaps has a checkered history, and the current shortage of transparency would seem to play into the hands of those taking on the risk. (There’s no mention of the collateral obligations in the releases, which research suggests is crucial to the overall cost-benefit of a deal.)
Meanwhile, as long as ITV workers don’t end up like these annoyingly stubborn Texans, the deal should suit both parties.
ITV completes £1.7 billion longevity swap with Credit Suisse – Artemis blog
Financial News: ITV Signs GBP1.7B Pensions Longevity Deal – WSJ
First LGPS fund enters into a longevity swap – Eversheds (2009)
JPMorgan to launch death-rate index – FT Alphaville (2007)