Consultancy Towers Watson has launched a service enabling pension schemes to gain direct access to the reinsurance market for hedging longevity risk on final salary liabilities.
Towers Watson Longevity Direct allows pension schemes to own a ready-made insurance ‘cell’ that can write insurance and reinsurance contracts for longevity swap transactions.
According to Keith Ashton, UK head of risk solutions at Towers Watson, this structure significantly reduces the cost of hedging longevity risk for pension schemes, by removing the need for an intermediary insurer to write the transaction.
He said it also means bigger transactions can be completed and the best reinsurance pricing can be accessed.
Mr Ashton commented: “Access to the reinsurance market has become increasingly expensive and inefficient in recent years, but the appetite from defined benefit pension schemes to hedge their longevity risk has been growing strongly.
“Traditional intermediary costs can be several times higher than accessing the market directly and the aim of Longevity Direct is to provide more affordable and efficient access to the market.
He added: “We find that pension scheme and reinsurer interests are typically very aligned; a direct agreement can be much less complex than the longevity swaps we have seen in the past.
“For these reasons we’re confident that the opportunity to access the reinsurance market directly is one that will appeal to a range of pension schemes who have previously held back.”