Carillion defined benefit (DB) Pension Trustee (the Trustee) has secured a longevity swap between Deutsche Bank and five DB pensions schemes sponsored by the company.

The deal covers around 9,000 pensions with a liability of around £1bn.

The longevity swap, which hedges against the risk of rising costs due to the current pensioners of the scheme living longer than expected, is part of Carillion's strategy to reduce pension risk, enhance the security of members' benefits and increase certainty over future costs.

Robin Ellison, the Trustee chairman, said: "Pension scheme liabilities have risen significantly in recent years due to increasing life expectancy. The Trustee is pleased to announce that by completing this transaction with Deutsche Bank AG, it has hedged this risk for the members covered by the swap thereby helping to improve the security of benefits for all members."

Richard Adam, Carillion Group finance director, said: "We are delighted the Trustee has secured this deal to remove a significant amount of risk at an attractive price. The longevity swap reflects Carillion's commitment to ensuring the security of the benefits of all our pension scheme members and reducing pensions risks."

The five separate schemes, which range in size from approximately £50m to £400m, were priced as a single a scheme but were completed as fiver separate swap contracts.

Carillion plc was advised by PricewaterhouseCoopers (PwC) and Mercer advised the Trustee.

Andrew Ward and Suthan Rajagopalan of Mercer said: "This is another example of a trustee and sponsor looking to capitalise on the opportunity to manage the risk associated with longevity. We are seeing increasing interest in this area as trustees and sponsors develop their plans to reach a sustainable position in the longer term."

They added that updating the scheme's information allowed reinsurers to "sharpen their prices".

Paul Kitson, PwC partner, said: "This deal shows companies who sponsor a number of schemes and had previously thought that a grouped longevity swap was not achievable to reconsider their risk management options."

"We expect companies' appetite to protect themselves against unplanned pension payments from people living longer will continue. Demand for such transactions could raise the risk that over time pricing will increase as reinsurance capacity is used up.

"Schemes and sponsors who are holding back on deals to see how the market and pricing develops could be playing a risky strategy as the market for longevity hedging deals could ultimately lead to a capacity crunch, which could lead to higher prices."

First published 11.12.2013

monique_simpson@wilmington.co.uk