Marsh & McLennan Companies UK Pensions Fund(MMC) has announced the largest longevity risk for a UK pension fund since 2014.

The transaction, which reinsures the longevity risk of £3.4billion ($4.3 billion) in pension liabilities, will provide long-term protection and income to the fund if the covered participants live longer than expected.

It also lowers the risk that MMC will face unexpected pension contributions due to an increase in pensioner life expectancy.

The fund's trustee chose Prudential Financial and Canada Life Reinsurance for the longevity reinsurance that helps secure the pensions of about 7,500 plan participants.

The reinsurance is divided equally between the two reinsurers and Mercer Ltd led the advice.

To efficiently transfer the longevity risk from the pension plan without the payment of an upfront premium, the trustee established a wholly owned insurance company on the 'Mercer Marsh' captive platform with its own independent board of directors.

This is Prudential's second reinsurance agreement using a captive structure: the first was the record £16 billion longevity risk transfer transaction with the British Telecom Pension Scheme in 2014.

"The MMC UK Pension Fund transaction reflects the fact that de-risking is the new normal," said Amy Kessler, head of longevity risk transfer at Prudential.

"In every industry peer group, companies are choosing to reduce the longevity risk embedded in their pensions through buy-ins, buy-outs and longevity hedging and a full range of solutions exist to help secure pension promises and reduce risk to funding levels."

Kessler added that "a great deal of uncertainty about future longevity improvements" remains in the industry.

"Pension plans that decide to keep their longevity risk rather than hedge it are maintaining a risky strategy - the timing may be particularly good for non-UK sponsors to accelerate their de-risking plans to take advantage of comparatively low sterling exchange rates," she said.

First published 21.09.2017

Lindsay.sharman@wilmingtonplc.com