HSBC’s UK pension scheme has closed a £7bn longevity risk transfer deal with a Prudential subsidiary, the second largest de-risking deal in the UK, highlighting growing demand to hedge longevity risks through a captive approach.
The deal, which insures half of HSBC’s scheme liabilities, consists of an insurance contract with HSBC’s Bermuda subsidiary, which in turn reinsures the longevity risk to the Prudential Insurance Company of America (PICA), a subsidiary of Prudential Financial.
Captive approaches to longevity risk differ from buy-in or buyout deals by allowing pension schemes to use their own insurance business and then access the reinsurer directly, rather than an outright transfer of liabilities in the form of a buyout.
Amy Kessler, PICA’s head of longevity risk transfer, said that the captive approach has become the strategy of choice for large pension schemes.
“The HSBC transaction demonstrates the level of credibility and success captive longevity risk transfer transactions enjoy in the current market,” she added.
In a statement to its scheme members, HSBC highlighted that the Bermuda subsidiary had been chosen to access the bank’s existing insurance infrastructure and achieve better value for members while not affecting the tax position of the scheme.
Other examples of schemes pursuing a captive approach to longevity risk transfers include the British Airways Pension Scheme, which completed a similar transaction through a Guernsey-based contract last year and the pension fund for Marsh & McLennan, the parent of Mercer, which covered £3.5bn in liabilities through an insurance subsidiary in Guernsey.
Last year there was a sharp increase in bulk annuity transactions, where UK schemes closed some £20bn in buy-in and buyout deals.
The UK’s largest longevity risk transfer deal was signed in 2014 by the BT Pension Scheme, which completed a $27.7bn (£22.8bn) reinsurance deal with PICA.