Boats, burgers and how long for longevity?
June 10, 2013
My son loves boats. He’s only 17 months old, but we live in Greenwich so going to see the Cutty Sark (a restored eighteenth century tea clipper based in a dry dock in Greenwich) is a regular pilgrimage for me when I sense my son is about to have a full-scale melt down and we need a distraction quick! I was on one of these pilgrimages recently and I noted a food market in the area by the Cutty Sark. "Last few burgers remaining!" came the call from one stall. "Get it while it’s hot!" the proprietor went on.
The smell of cooking burgers, together with the realisation that I had no option to come back later, was too much and I purchased a burger. It was indeed very nice and I went home happy and contented.
Fast forward to later that evening. My son was about to have melt down number two of the day, so quickly back in the pushchair and back out to the Cutty Sark for some calming distraction. But what did I discover at the food market some six hours after the ‘last few remaining’ proclamation from the market stall owner? Burgers on sale and no sign of the predicted 'sold out' sign I expected.
Why am I telling you this story about burgers and boats in a pensions blog (other than to promote the Cutty Sark – go see it if you’re in London – well worth the trip)? Well the point is I have always been very dubious of ‘last few remaining’ messages. And this relates to pensions funding as much as it does to burgers...
Longevity hedging continues to be a subject many UK pension plans are considering, either actively on live projects or waiting to see how the market (and pricing) develops. Over £20bn of longevity swaps have been written by UK pension schemes and I predict further transactions this year. But this is just the tip of the iceberg considering the £1.5tr of private sector defined benefit liability in the UK. There’s always been a question about the ability of global reinsurers to take on even a significant chunk of UK longevity risk if UK pension schemes continue to desire derisking and ultimate settlement.
Two recent conversations with reinsurers have caused me concern. Firstly, I was talking to a reinsurer who said that their likely capacity for longevity risk across Europe was £5bn, of which they’ve already used half. That’s not going to dent the £1.5tr. Secondly, another reinsurer is redirecting resource to US and Canadian pension fund longevity deals as these are better at offsetting their life insurance exposures which are mostly US in origination. That reinsurer is appearing noticeably less interested in UK longevity deals, certainly in the typical UK deal size of £1-2bn (US and Canadian deals can be £20bn in size so the fixed-cost spend is much lower relative to the actual risk transfer).
So, can we expect ‘last few remaining!’, ‘get it while it’s hot!’ messages for longevity hedging? We’re not there yet – but are we just starting to see the first signs of competition and price hardening in the market? It’s difficult to predict.
But as I think about my burger experience, it raises a question. Which would have been worse: buying the burger earlier than I ideally would have done or missing the chance to buy the burger at all? It was a very good burger and, you know what, I probably would do the same again and buy early to avoid regret.
(My apologies to any vegetarians reading this particular blog post. Beanburgers were available.)
Paul Kitson is a partner in our Pensions team. You can contact him on 020 7804 8174 or by email at [email protected]