UK defined benefit (DB) pension schemes are now very well funded, and the government is expected to offer an update on policy options for DB schemes in the new year.

This could drive even more interest in schemes’ endgame options.

A likely target for many schemes will be their longevity risk. Historically, longevity risk has been hedged through an insurance buy-in or buyout, but in our view longevity swaps have become an attractive alternative.

The cost of longevity swaps has decreased materially. The risk fee charged by reinsurers for taking on longevity risk has fallen, driven by increased competition amongst reinsurers and the higher interestrate environment relative to history.

Another factor is that updates to the CMI longevity tables over the past two years suggest a roughly sixmonth reduction in pensioner life expectancy, which our analysis suggests is equivalent to a fall in liabilities of around 2 per cent.

As well as reduced costs, reinsurers are now more willing to take on longevity risk for non-pensioners as well as pensioners; and pension schemes are able to collateralise a longevity swap using a wide range of asset types, reducing the impact of a swap on wider investment strategy.

These dynamics have changed the game for pension schemes seeking to de-risk. Whether a scheme opts to run on, or to prioritise achieving buyout, using longevity swaps can make their goals more achievable.

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