The UK pension fund longevity hedging market could triple over the next three years, however new analysis has raised concerns over the capacity of reinsurers to take on the risks of this growing market.

Over £250bn of longevity swaps have been written by UK pension schemes since the market emerged in 2009, and PricewaterhouseCoopers (PwC) said that it expects the market to reach £60bn by 2016.

However, PwC said that if the number of longevity swaps grows as predicted, then this could lead to a "capacity crunch" in the market.

Paul Kitson, PwC pensions partner, said: "While many UK pension schemes are actively considering longevity hedging as a key way to reduce risk in their schemes, many have been holding back on deals to see how the market and pricing develops.

"This may be a risky strategy as the market for longevity hedging deals could be heading for a capacity crunch."

Many global reinsurers are increasingly filling their capacity and/or moving their focus to other countries where defined benefit (DB) schemes are also prominent, but deal sizes are bigger, PwC said.

This may mean the number of reinsurers interested in UK pension scheme longevity transactions could reduce and lead to increases in the price to hedge longevity.

Kitson said at least one reinsurer has already used up over half of its capacity for these types of risks and others are directing their resources to the US, Canada and other markets where deals could be much larger, leaving reduced appetite for UK deals.

He said: "The geographical origin of longevity risk is of less importance to global reinsurers, so while the UK has passed significant pension scheme longevity risk to reinsurers in recent years, the UK does not have a monopoly on reinsurers."

DB plans in other countries are now looking at similar transactions, which then means there could potentially be less capacity for UK deals.

Kitson said: "The £20bn of longevity swaps already written in this market is only the tip of the iceberg given the £1.5trn of private sector defined benefit pension liabilities in the UK.

"We are already seeing the first signs of reduced competition, meaning UK pension schemes that take too long to take advantage of longevity hedging could be left facing limited options and potentially higher prices."

First published 31.07.2013

monique_simpson@wilmington.co.uk