Longevity hedging

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Hedging longevity risk is growing in significance for many pension schemes. As interest rate and inflation risks are increasingly hedged through a liability-driven investment (LDI) approach, the potential impact of longevity risk has grown in proportion to other risks.

Insight has extended the LDI toolkit for our clients by providing a platform through which they and their consultants can efficiently transfer longevity risk to the reinsurance market.

Our longevity-hedging platform, when combined with our existing LDI and fixed income solutions, provides our clients with the key building blocks needed to manage all of their liability-related risks, and to focus on helping to generate the cashflows required to meet pension payments.

Longevity risk grows in significance as other risks are hedged

Longevity risk grows in significance as other risks are hedged


For illustrative purposes only.

Benefits of Insight's longevity hedging platform

  • Dedicated insurance entity: Any pension scheme wishing to hedge longevity risk must do so via an insurer. Under the Insight longevity platform, the role of the insurer is fulfilled by a dedicated entity created for each longevity risk transaction, offering security, efficiency and flexibility.
  • Transaction documentation: We have worked with a leading law firm to develop a suite of legal documents that cover all key aspects of a longevity transaction, allowing transactions to be implemented with maximum efficiency.
  • Efficient use of LDI assets: Managing the longevity swap alongside other LDI exposures enables schemes to set up a unique pool of collateral to support all their hedges.
  • LDI systems and infrastructure: The ongoing management and collateralisation of the longevity swap can benefit from Insight’s robust operational processes and systems.
  • Ongoing reporting: By playing the role of calculation agent, Insight can provide detailed reporting on the ongoing performance of the longevity hedge.
  • Experienced team: Schemes would benefit from our experience of working with external advisors to implement complex transactions

For more information on Insight’s approach to longevity hedging, please read our paper.

Further Reading

  • The case for longevity hedging: If longevity risk is not hedged, the implications for a pension scheme could be significant – it could lead to a delay in reaching target funding or increased deficit contributions. A longevity swap could help a scheme avoid these outcomes.
  • How to hedge longevity risk: Pension schemes are increasingly seeking to hedge longevity risk. This requires access to the reinsurance market – uncharted territory for most schemes. Insight’s longevity platform aims to achieve an effective and efficient longevity hedge while maintaining flexibility for the future.
  • How to price a longevity swap: Pension schemes are increasingly seeking to hedge longevity risk using longevity swaps. A key question is how such transactions are priced. This paper outlines the factors reinsurers consider when pricing a longevity swap and how COVID-19 may impact this.
  • Longevity hedging for pension schemes – investment implications and new developments: Pension schemes are increasingly considering whether and how to hedge longevity risk. This paper outlines how longevity swaps work, their implications for pension scheme strategy, and explains key developments in the market.
  • Longevity hedging roundtable – encouraging innovation in the longevity market: In December 2019, Insight welcomed a cross-section of key stakeholders from across the longevity market including reinsurers, capital providers, lawyers, academics and advisers to discuss the challenges facing the longevity hedging market and consider how we might help to drive innovation for our clients, and the wider industry. In this paper, we summarise the key discussion points from the roundtable and set out some of the suggested actions.
  • Longevity hedging – how Insight can help you manage the biggest unhedged liability risk: We explain how pension schemes can hedge longevity risk and provide a case study on how we have helped a scheme to manage this risk.
  • Hedging longevity risk – the benefits of an offshore insurer: UK pension schemes seeking to pass longevity risk to a reinsurer are required to use an insurance intermediary, which may be onshore or offshore. We outline the key benefits of an offshore insurer compared with an onshore UK insurer.
  • Looking into longevity: Q&A with Professor David Blake: Defined benefit pension schemes are increasingly focusing on the impact of longevity risk on their liabilities. Howard Kearns, Longevity Director at Insight, speaks to Professor David Blake, Professor in the Faculty of Finance at Bayes Business School and Director of the Pensions Institute, on the impact of the pandemic on longevity, the consequences for pension schemes, and the future of the longevity hedging market.
  • Case study: How a pension fund hedged its longevity risk: The ICL Group Pension Plan insured the longevity risk associated with over £3.7bn of liabilities in early 2021, using an Insight Investment platform to provide access to the reinsurance market. Richard Cooper, who is Senior Partner and Head of Momentum Investment Solutions and Consulting, is the Plan’s CIO. In this interview, he explains the rationale for conducting a longevity hedge, why the Plan opted against a buy-in, and how they worked through the practical details – as well as considering lessons learned from the process.
  • Top 10 structuring considerations for longevity swaps: This document has been drafted with the input of senior legal practitioners from firms actively involved in the longevity hedging market, and outlines 10 key structuring features that should be considered alongside commercial factors when implementing a longevity swap transaction. It is intended to frame contractual negotiations and to simplify and streamline the documentation process.


Important information

The value of investments and any income from them will fluctuate and is not guaranteed (this may be partly due to exchange rate fluctuations). Investors may not get back the full amount invested. Past performance is not a guide to future performance.

A credit default swap (CDS) provides a measure of protection against defaults of debt issuers but there is no assurance their use will be effective or will have the desired result.

Derivatives may be used to generate returns as well as to reduce costs and/or the overall risk of the portfolio. Using derivatives can involve a higher level of risk. A small movement in the price of an underlying investment may result in a disproportionately large movement in the price of the derivative investment.

Investments in bonds are affected by interest rates and inflation trends which may affect the value of the portfolio.

The investment manager may invest in instruments which can be difficult to sell when markets are stressed.

Where leverage is used as part of the management of the portfolio through the use of swaps and other derivative instruments, this can increase the overall volatility. While leverage presents opportunities for increasing total returns, it has the effect of potentially increasing losses as well. Any event that adversely affects the value of an investment would be magnified to the extent that leverage is employed by the portfolio. Any losses would therefore be greater than if leverage were not employed.