£20bn of longevity swaps forecast for 2023 by WTW

Brokerage and consultancy WTW is forecasting a busier year for the longevity swap market in 2023, with increasing reinsurance capacity and market participants available and attracted to longevity risk transfer a driver.

Throughout 2022, we recorded around UK £17 billion of longevity swap and reinsurance transactions in our Deal Directory that tracks this marketplace.

WTW notes that there were over £16bn of longevity swap deals in 2022, a relatively busy market, but forecasts a range of factors to help drive longevity risk transfer activity higher in 2023.

Shelly Beard, Managing Director, Pensions Transactions at WTW, commented on the pension risk transfer space, “The bulk annuity and longevity hedging markets continue to be busy with demand from late 2022 spilling over into 2023.

“The rising gilt yields, along with improved insurer pricing due to widening credit spreads and improved longevity reinsurance pricing has resulted in some schemes seeing an improvement in buyout funding levels to the extent that buyout is now within reach much earlier than anticipated.

“We have also seen a significant increase in the number of full scheme buy-ins and this trend is expected to continue in 2023.”

For 2023, WTW is forecasting another active year, as market conditions make pension and longevity risk transfer more conducive.

“We expect this busyness to continue with several longevity swaps due to be announced in 2023,” WTW explained.

Saying that, “Reinsurers continue to increase capacity for deferred longevity reinsurance with most reinsurers now able to cover large proportions of deferred members – this has been a key driver for improvements in deferred bulk annuity pricing and more schemes are also now considering longevity swaps including deferred members.”

One of the drivers of an active longevity risk transfer market is that, “Over 2022, the cost of hedging future increases in life expectancy has fallen, offering attractive opportunities for pension schemes looking to pass on this risk.”

Part of this is the increased capacity and market competition, as reinsurance firms increasingly look to longevity risk as an attractive underwriting class of business.

“All else being equal, economic principles tell us that an increase in supply will lead to a fall in prices,” WTW explained. “A combination of new entrants to the longevity market and a universal increase in the capacity of the existing reinsurers has resulted in downward pressure on prices.”

As a result, the absolute cost of longevity reinsurance has been falling, both through direct longevity swaps and risk transfers, as well as through bulk annuity and related pension risk transfer deals.

Tom Ashworth, Director at WTW, provided an outlook for the pension longevity risk hedging sector.

“We expect more schemes than previously to consider use of longevity swaps as a way of managing longevity risks. These schemes are often those of scale and so we will continue to see significant liability transferred via pensioner buy-ins and longevity swaps,” Ashworth said.

Forecasting that, “Overall, despite gilt yields reducing the absolute value of liabilities, I expect a busy year with in excess of £40bn of bulk annuities transacted and £20bn of longevity swaps, meaning 2023 has the potential to be the biggest year ever in the de- risking markets.”

View details of many longevity swaps and longevity reinsurance deals in our longevity risk transfer deal directory.