Case study

How LV= converted its longevity swap into a buy-in

Pensions & benefits

LCP advised the LV= Employee Pension Scheme on the transaction, improving the security of members’ benefits whilst reducing capital volatility for its insurance company sponsor, LV=.

The background

The Trustee had entered into a longevity swap in 2012 with ReAssure (which was then reinsured onwards within the Swiss Re group).

Over the following years, the asset strategy was de-risked as the funding level improved.
While this de-risking strategy increasingly stabilised the funding level, it also meant:

  • The annual risk fee for the longevity swap became more significant in the context of the
    Scheme’s lower expected return on its assets; and
  • Increased volatility in the IAS19 surplus. This in turn led to increased volatility in the
    amount of capital that LV= was required to hold, as a regulated financial institution.

What we did

We worked with LV=’s capital efficiency team and the Trustee’s investment advisers to determine the size and profile of buy-in that could be accommodated whilst optimising capital efficiency for LV=, avoiding a funding strain and enhancing member security.

We designed a bespoke insurer tender process in a busy buy-in market to maximise insurer engagement (and therefore competition) and efficiency for the transfer of the longevity swap.

We negotiated a robust price lock mechanism and asset delivery portfolio with the insurers, designed to weather the market volatility caused by the outbreak of Covid-19, saving over £10m in transaction costs associated with bespoke derivative contracts and assets held by the Scheme.

The outcome

The longevity swap was converted into a £800m buy-in with Phoenix Life, and the competitive pricing achieved led to an improvement in funding and security of members’ benefits, whilst reducing capital volatility for LV=.

The swap conversion placed the Scheme a further significant step forward in its de-risking