Longevity swap market potentially larger than buyout sector: Pension Corporation

The UK's nascent longevity swap market could overtake the buyout sector in nominal terms as large corporates continue to focus on derisking their pension schemes, according to Pension Corporation chief financial officer, Rob Sewell.

Actuarial consultants Lane Clark & Peacock predicts that the UK's buyout market will conduct about £4 billion worth of deals in 2009 – half the £7.9 billion completed in 2008. But in a video interview with Life & Pensions, Sewell argued that this figure could be eclipsed by a demand for longevity swaps from pension schemes seeking to derisk their balance sheets.

"The longevity swap market could, in nominal terms, reach a larger scale than the buyout sector," he said.

Sewell said a buyout was not an option for all schemes: "There are pension funds that are of such a size they will never buyout – either they don't need to, or the market simply does not have the capacity to take them."

For these schemes, he said using a longevity swap represented "an extension of the whole concept of pension schemes derisking their balance sheets. And they also allow large schemes to derisk in a way that may end in buyout".

The CFO said that while Pension Corporation had a longevity swap offering in place for more than two years, the fact that two separate schemes had transacted in 2009 – the Babcock International and Royal Berkshire pension funds – meant there had been a significant increase in the deal pipeline.

Despite longevity swaps' potential to outstrip the buyout market, Sewell said it was not a case of them being competitor products, but that instead the two options "complemented each other".

Sewell also said that while the impact of the Bank of England's quantitative easing programme could provide additional volatility to pricing in the short-term, it would have no long-term impact on the buyout market's structure. Even with this additional short-term volatility, he said that pricing, while not back to 2007 figures, "is back to its pre-Lehman levels".

The full interview can be found here.