How Aviva’s leaping into the record books by hedging death rates
While the news headlines surrounding insurer Aviva this morning focused on its encouraging profits and ongoing turnaround, there was one nugget of information buried deep inside its results which failed to catch the eye – just the biggest pension trade in history.
In a brief line on page 126 of the 175-page tome, Aviva says that it has 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 particular trade, called a 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.
If Aviva pensioners live longer, the reinsurers make a loss, if they die early, they profit. It is basically a bet on death rates, a developing trend in the financial world demonstrated by the float of enhanced annuity providers Partnership and Just Retirement.
Clearly, Aviva are no slouches when it comes to issues of people living too long (it is an insurer after all). But the deal is also one of a kind because it bypasses the intermediary market, with the pension scheme going direct to the reinsurance market to broker the deal instead of through a middleman.
The deal itself does not involve a wholesale transfer of assets from Aviva to the reinsurer – the premiums from Aviva to the resinsurers and the payments from the reinsurer to the pensioners occur on a monthly basis over time – but with innovation in this area happening all the time expect to see more of these deals in future.