The last 16 months have seen a lull in large longevity hedges by pension schemes. That was until ITV entered into a £1.7 billion longevity swap with Credit Suisse to fully hedge the longevity risk for 12,000 of its pensioner members.
Under the contract, the company will make fixed monthly payments to Credit Suisse which, in turn, will make payments to the scheme that broadly match the value of benefits being paid out.
The deal, concluded in August, was the third largest of its kind so far and follows in the footsteps of significant deals, such as the colossal £3 billion swap by BMW relating to around 60,000 pensioners, which completed in February 2010.
Other similar deals have included a longevity swap by engineering group Babcock in May 2009 and a £1.9 billion swap between RSA Insurance Group and Goldman Sachs and its insurance subsidiary Rothesay Life in July 2009.
Gillian Sheldon, senior adviser in Credit Suisse’s UK investment banking coverage team, comments: “It was an important transaction for ITV given its focus on strengthening its balance sheet and managing its pension risk. It is a significant step in reducing the exposure of ITV’s business to legacy pension risk.
Hugo James, managing director in the fixed income department at Credit Suisse, says: “It was a complex transaction. The ITV pension scheme has a relatively complex benefits structure. So, trying to come up with a close-matching economic hedge that could be placed back into the market required skill. There were also a significant number of parties involved in the transaction.”
ITV was advised by PricewaterhouseCoopers and law firm Hogan Lovells, while the pension fund was advised by Towers Watson, Mercer, Penfida and law firm Sacker & Partners.
The trade required strong collateral terms and Credit Suisse undertakes daily collateral assessments. “This is the first time this has been done for this type of trade,” says James.
Credit Suisse has not disclosed how it is passing on the risk, although James states: “Credit Suisse does not take directional risk in terms of longevity – we are not building up longevity risk on the balance sheet.”
The deal is being perceived by industry participants as a substantial boost to the longevity swap market, although James plays this down. “It is easy to get excited about these deals and say there is going to be another wave,” he says. “Risk transfer is an ongoing process and it takes considerable time to do, but transactions of this size are likely to remain relatively few and far between.”
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