Longevity swaps
Produced in partnership with India Trusselle and Stephen Walsh of Mayer Brown and Stephen Woods of Pinsent Masons
Longevity swaps

The following Pensions guidance note Produced in partnership with India Trusselle and Stephen Walsh of Mayer Brown and Stephen Woods of Pinsent Masons provides comprehensive and up to date legal information covering:

  • Longevity swaps
  • What is a longevity swap?
  • How a longevity swap works
  • What is the benefit?
  • Longevity swap products
  • Provider/ product selection
  • Funding impact
  • Swap provider credit risk
  • Advice and scheme governance
  • Structuring the swap
  • more

Pension schemes and their sponsoring employers are faced with a number of risks in relation to their defined benefit pension schemes, one of the most worrying of which is that of paying for increasing life expectancy.

Traditional methods of hedging pension scheme risk, such as buy-outs or buy-ins, have in recent years faced competition from new de-risking solutions based on a ‘swap’ contract. A ‘swap’ is a generic term for a contract under which the parties exchange a series of cashflows linked to some underlying asset or other variable.

For further information on buy-outs and buy-ins, see De-risking—pension buy-outs and buy-ins.

What is a longevity swap?

A longevity swap is one way for a pension scheme to hedge the risk that pensioners live longer than expected. Longevity swap contracts operate by requiring the pension scheme trustees to make pre-determined regular payments (typically monthly or quarterly) to the swap provider for a fixed period of time in respect of specified pensioners. In return, the swap provider is obliged to pay the pension scheme trustees, at the same intervals, pre-determined amounts until those pensioners have died.

How a longevity swap works

A typical longevity swap contract is illustrated below:

$1

The swap is structured around the following three cashflows:

  1. Cashflow 1: the pension scheme trustees are obliged to pay a regular pension until each pensioner