Bottom Line: A leap into record books by hedging death
WHILE the salient facts surrounding insurer Aviva yesterday focused on its encouraging profits and ongoing turnaround, there was one nugget of information which might have failed to catch the eye – the biggest pension trade in history.
In a brief statement in its 175-page report, later amplified by chief executive Mark Wilson, Aviva said that it had effectively sold £5bn of pensioner payments to the reinsurance market, the largest trade of its sort ever, dwarfing the £3.2bn trade made by BAE Systems on its pension scheme back in February 2013. Some 19,000 members of the Aviva Staff Pension Scheme have been reinsured from the company’s payment books as part of the deal, cutting the financial risks to the pension scheme by a third.
Where once investment banks and sell-side whizz kids were the primary sources of financial innovation, today it is UK corporate pension schemes and insurers who represent the breeding ground for highly engineered financial trades, driven in part by people living much longer than companies have budgeted for.
This longevity swap effectively prices the risk that Aviva pension scheme members will live too long – and cost too much in future pension payments – and then sells risk to reinsurers. Three have bought the swap: Swiss Re, Munich Re, and Scor.
The move will help cut £1.7bn from a £5.8bn loan, shoring up its balance sheet and giving investors and analysts even more reason to cheer the company’s steady turn back towards health.