Longevity swaps: how they apply to run-on and buy-out | Insight Investment

As pension schemes consider whether to run on for the longer term or to focus on buy-out, longevity risk remains the largest unhedged risk for many. Longevity swaps are an important tool to manage this risk. As the cost of longevity swaps has continued to decrease, now may be an ideal time to take a closer look at this tool.

• Longevity swaps are increasingly attractive, with costs reducing due both to falling life expectancy projections and strong competition in the longevity reinsurance market.
• New innovations mean longevity swaps are even more appealing: reinsurers are increasingly willing to take on non-pensioner as well as pensioner risk, and to accept a wider range of assets as eligible collateral.
• A longevity swap can be a positive for schemes contemplating a future buy-out, as it can reduce or remove exposure to changes in an insurer’s view of life expectancy, supporting a straightforward transfer of risk at the point of buy-out.

Figure: Pricing has fallen most recently due to higher real discount rates and lower life expectancy projections

Source: These estimates are based on the indicative longevity swap pricing methodology used by Club Vita LLP in its reporting to pension schemes and are relative to CMI 2019 assumptions. Their indicative longevity swap pricing methodology uses a combination of market pricing data, information received from longevity reinsurers and survey responses from 25+ insurers and reinsurers representing the vast majority of the longevity risk transfer market. The estimates are indicative only and they make no allowance for intermediary fees.