Advising Pirelli on £600m longevity swap

August 2016
Deal only the second of its kind, as the longevity swap market for mid and small pension schemes opens up

Cardano and Mercer, acting as advisors to the Trustees, announced today that named-life longevity swaps have been agreed for two of Pirelli’s UK defined benefit pension schemes. The swaps cover almost all of the two funds’ current pensioners and contingent dependants, consisting of around 5,000 members and a total liability value of around £600m.

The contracts were negotiated with Zurich Assurance Limited (“Zurich”) for the Pirelli General Pension and Life Assurance Fund and the Pirelli Tyres Limited 1988 Pension and Life Assurance Fund (together the “Funds”).

The swaps hedge a substantial portion of the Funds’ longevity risk by protecting against the risk of members living longer than expected. Previously, named-life longevity swaps have only been struck by larger pension schemes. However, the Pirelli transaction is the second completed in a structure that is accessible by smaller schemes. This was introduced by Zurich in 2015 and holds the swap mechanism within an insurance wrapper. The market for mid-sized and smaller schemes is likely to accelerate as a result.

Cardano and Mercer jointly advised on the deal, as investment and transaction advisors respectively. This included overall risk management considerations, feasibility, provider selection and implementation.

Andrew Stewart, Head of Client Solutions at Cardano and adviser to the Pirelli schemes, commented: “This is an excellent outcome for Pirelli and its pension schemes. The Trustees have put in considerable work in recent years to ensure that the funding risks are well managed and this is another significant step in that direction.

“This transaction removes a significant risk from the schemes. Crucially, it has been executed without requiring changes to the existing investment or interest rate and inflation hedging arrangements. It therefore allows for a material reduction in risk exposure without detriment to the long term funding goals.”

Tony Goddard, Pension Manager at Pirelli, added: “Significant steps have already been taken to manage other risks in the Funds. We are pleased to continue this process with these transactions and to seize the early opportunity to hedge longevity risk. The longevity swaps help to improve the security of benefits for all members by removing the uncertainty from members living longer than forecast. They also allow us to retain future investment flexibility.”

“Cardano and Mercer have done an excellent job in advising the Trustees. The pricing ultimately achieved was significantly more attractive than both our initial expectations and better than offered by alternative options. The streamlined terms also made implementation easier.”

 Andrew Stewart concluded: “The nature of longevity risk hedging means it will always be a relatively time consuming and involved process. To ensure the effort is justified, trustees need to be cognisant of the overall risk management position and how a longevity hedging solution will impact the broader investment strategy and funding goals.”

“In this regard, longevity swaps may provide a significant advantage over bulk annuity policies, as they do not require a large up front transfer of capital. Historically, named-life longevity swaps were only available to very large pension schemes but recent product development by providers such as Zurich means that small to medium sized schemes can now also access these solutions.”