LONDON, 27 January 2014 – Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), predicts a significant increase in the number of longevity swaps during 2014 and 2015 as a result of additional capacity and better pricing from the reinsurance market.

Aon Hewitt calculates that from the reinsurance market alone there will be up to £100 billion in available capacity for pension scheme longevity risk during the next two years. The increased capacity is a result of a more mature market and follows a year of substantial deal volume.

Aon Hewitt, which led the advice on £8 billion of the £8.9 billion in deals completed during 2013, believes this is a reflection of a market which has developed significantly in the last year. While in 2009, when the longevity swap market started, there were at most six reinsurance companies willing and able to offer these types of deals – there are now 15-20 companies proactively operating in this space. The result is a bigger and more competitive market, offering significant opportunity for a broader range of UK pension schemes.

Martin Bird, senior partner & head of Risk Settlement at Aon Hewitt, said:
“In the five years since Babcock International closed the first deal with Credit Suisse, the longevity swap market has evolved significantly and is now able to offer increased capacity and better pricing for UK pension schemes. Originally, these deals were regarded as only right for a very few schemes which were typically very large and usually with an industrial or manufacturing company sponsor.

“During 2013, we saw both the smallest and the biggest longevity swaps so far executed in the market, involving a greater range of schemes in terms of both nature and complexity. With an increase in reinsurance market participants who are willing to execute longevity swaps, a more competitive marketplace and a reduction in transaction lead times as market structures start to become more streamlined, we believe 2014 and 2015 will show significant growth. As schemes continue to gain a deeper understanding of their longevity risk exposures, we see an increasing appetite across a broader range of schemes to make use of the competitive reinsurance market capacity.”

Aon Hewitt believes that while the reinsurance market appetite has increased significantly in recent years, capital markets also offer a future additional pool of funding capacity.

Matt Wilmington, partner at Aon Hewitt said:
“Capital markets remain an additional source of potential capacity in the future, but we believe it is unlikely to materialise in the next two years for several reasons. Primarily, the main challenge is the differing objectives and time horizons of institutional investors compared with pension schemes.  While significant tailored capacity is available from the reinsurance market, the capital markets will find it harder to compete.  However, this is not insurmountable and we expect to see continued innovation in this market in the coming years, leading to a broader capacity base and set of options for UK pension schemes.”

Media Contact: 
Colin Mayes                                       Giles Abbott
 Aon Hewitt                                         Capital MSL
 01372 733689                                    020 3219 8805
 colin.mayes@aonhewitt.com              giles.abbott@capitalmsl.com
 

Notes to editors

What is a longevity swap?
A longevity swap is a mechanism that allows a pension scheme to offload the risk of its members living longer than expected (longevity risk) to a third party, usually an insurance/reinsurance provider or an investment bank.

Under the arrangement of a longevity swap, a pension scheme commits to making regular payments to a third party based on agreed expected mortality rates. In return, that party undertakes to service the payments to scheme members based on actual mortality rates. The structure of longevity swaps is similar to that of interest and inflation swaps.

A register of UK pension fund longevity swap deals to date, is available from Aon Hewitt.

About Aon Hewitt
Aon Hewitt empowers organisations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organisational and personal performance and growth, navigate risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness.  Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide.  For more information on Aon Hewitt, please visit www.aonhewitt.com.

Sign up for News Alerts: http://aon.mediaroom.com/
Follow us on Twitter: @aonhewittuk

About Aon
Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 65,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United