The Use of Longevity Swaps and Buy-ins and Other Unforced Errors

Making Transparent Risk Transfer Transaction Losses

“The Use of Longevity Swaps and Buy-Ins, and Other Unforced Errors” is a research paper from C-Suite Pension Strategies.

C-Suite looks at specific cases of risk transfers by DB pension schemes.  The work indicates :

• They have been costly and poorly timed.  Many are causing large losses.
• Transparency is not a priority for sponsor or schemes, with transaction details limited from the start and with obfuscation in the approach in subsequent sponsor financial documents.
• “Other Comprehensive Income” is used to avoid transactions impacting earnings (and the willingness of sponsors to undertake transactions at all).
• Life insurers have a regulatory arbitrage advantage and as sponsors hurry to cover up write offs, life insurers book profits on their side of the deal.

A conclusion is that heeding the Siren calls of the risk transfer industry can sound an unfortunate endgame to pension Odysseys.
The downgrades to life expectancy to come in 2023 will add to the impact of interest rate increases and will make deals look worse still.

“Get rid journey plans” remain dominant. More unforced errors will follow if the take away from the leveraged LDI crisis is to sell illiquid investments at the wrong time to protect a flawed strategy in which interest rate risk elimination is the absolute requirement.  

The financial impact needs watching.  C-Suite intend to track the data being published in 2023 by selected Groups with pension schemes on a derisking journey to see how their position has changed and what are the explanations provided.

The Risk Transfer Industry developed by life insurers and investment consultants is a highly successful feature of the pension provision.  Its role warrants sceptical analysis.  Consultants should apply their impressive marketing resources to publishing data on the financial impact of the deals and strategies they advocate.

Trustees have come to believe that they must reach the Gold Standard of buyout. Buy -ins and longevity swaps are just part of the process.  That pension values have fallen in real terms with inflation should be addressed.  What now is in members best interests?  That discretionary increases are possible is not even an industry debate.  Members, many trustees consider, should be grateful for what they have.  Yet it has been the derisking expectation set by the industry on their behalf that has made DB schemes into a legacy problem.  The pensions “Gold Standard” does not have 24 Carats.

“Derisking techniques are risky and come at a considerable opportunity cost.  Greater transparency is much needed.  It all shows it is time for a rethink.  Stable, long-term strategies remain the way to protect members – particularly in inflationary times”  William McGrath

Join us for a presentation on the paper in “Discretion is the better part of value” on 7th March 10.30am on Pensions Playpen.