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Aon warns pension schemes of dislocation in longevity swap pricing
Counsels caution on transacting at present

LONDON (27 October 2016) – Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), has said that lower rates of improvement in mortality in the UK are leading to a dislocation in current pricing for longevity swaps and that pension schemes should therefore consider delaying transactions until the market corrects.

A decade of smooth and relatively high rates of longevity improvement has shaped the pension industry over the past two decades and has become embedded in longevity reinsurers’ pricing models. However, mortality experience since 2011 increasingly suggests that there has been a sea change in the underlying trend, with much lower than expected improvements currently emerging.  

Tim Gordon, partner & head of Longevity in Aon Hewitt’s Risk Settlement Group, said:
“Mortality improvements in the UK have been much lower than expected over the past five years, averaging just 1% per year for males, compared with 3% per year in the first decade of this century. This is the most extreme reversal in mortality improvement trends seen in the past 40 years. What was initially assumed by many actuaries to be a blip is increasingly looking more like an earlier-than-expected fall-off in mortality improvements.

“The industry is currently trying to digest all the implications of this emerging information and – inevitably – it is taking time to feed through into insurance and reinsurance pricing.”

Martin Bird, senior partner & head of Risk Settlement at Aon Hewitt, said:
“While there remains a strong appetite across the industry to manage pension risk, with a particular focus on tackling the uncertainty relating to life expectancy, there is now a potential price dislocation in the market. If insurers and reinsurers are pricing using out-of-date mortality assumptions, schemes could be in danger of transacting on poor terms. Unlike a bulk annuity, a longevity swap is all about longevity – a consensus view on best estimate life expectancy is a critical component of a functioning and competitive market.

“If schemes are not confident that pricing is up-to-date and that the deal makes financial sense, they should consider delaying until the market corrects. The situation is not unlike where petrol station forecourt prices take time to adjust when the price of oil falls. But – unlike motorists having to refuel their cars – pension schemes can choose when to buy longevity insurance.”

For further information please contact:
Colin Mayes                                          Marina Jane Sanchez
Aon Hewitt                                             CNC
01372 733689                                         020 3219 8811         

About Aon
Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit:

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