JP Morgan has taken on £70m of risk posed by people living longer than expected in the first deal to hedge against higher life expectancy for a company pension plan's working members.
JP Morgan said yesterday the swap contract with the trustees of the Pall UK Pension Fund was based on future values of its LifeMetrics longevity index – a toolkit for measuring longevity and mortality risk in England and Wales, the US, Netherlands and Germany.
"Index-based hedges are particularly well suited to hedging the longevity risk of pension plans with significant deferred and active members," David Epstein, head of longevity structuring at JP Morgan, said.
JP Morgan is the hedge provider and collateral custodian for the deal, which was set up by the investment manager Schroder, to cover the British pension scheme liabilities relating to about 1,800 members with assets of £120m.
Only a handful of longevity swaps have been agreed for pension schemes in Britain – around £8bn in the past five years according to specialist insurer Pension Insurance Corporation.
The biggest so far involved the German car maker BMW which last December offloaded £3bn of risk from its British pension scheme to Deutsche Bank's insurance subsidiary Abbey Life.
Previous longevity deals have focused solely on pension plan members who have already retired, as hedging against increased life expectancy of members still working has been difficult to measure, JP Morgan said.
The index-based longevity swap with the trustees of the Pall Pension Fund, which is part of the global manufacturer Pall Corporation, has a 10-year term in which the fund's trustees can choose to adjust the size or structure of the deal. If the life expectancy improves at a greater rate than specified in the contract the fund receives an insurance payout.
JP Morgan is backing the Life & Longevity Markets Association, an organisation of investment banks, insurers, brokers and pension providers set up last year to construct capital market instruments to divide longevity risk into tradable portions.
The first longevity risk bond was issued by Swiss Re in December, which passed on $50m (£31m) of its own longevity exposure to the capital market in a bond format.