Longevity swaps to surge this year

The volume of longevity swap transactions is set to reach a record high this year, according to Towers Willis Watson, as reinsurers seek to compensate for an expected decline in bulk annuity deals.

More than £25 billion in longevity swaps are expected in 2020, as pricing has become more attractive, meaning that in several cases schemes have been able to hedge at little or no cost, relative to their technical provisions.

Improved pricing has partly been driven by lower-than-expected bulk annuity transactions, which the consultancy forecasts will come in at around half of 2019 levels, at between £20-25 billion.

Ian Aley, head of transactions at Willis Towers Watson, said: “Naturally there are questions about what Covid-19 means for ongoing longevity swap processes. Whilst the impact on each scheme today can be monitored, the prospects for future improvements in life expectancy are perhaps more uncertain than they ever have been – and it’s going to be many years before we know in full how Covid-19 and its economic side effects will affect life expectancies.”

The consultancy’s clients are taking the view that if they can afford to hedge longevity risk and the pricing looks attractive, now is a good time to proceed, rather than attempting to predict where the market might go in the future, Aley said.