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Heineken In 2.4 Billion Pound Longevity Swap Deal With Aviva

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http://uk.reuters.com/article/2015/09/14/uk-heineken-longevity-idUKKCN0RE0UD20150914

Brewer Heineken (HEIN.AS) said on Monday it had agreed a deal to transfer 2.4 billion pounds ($3.71 billion) in longevity risk to Friends Life, now part of insurer Aviva (AV.L).

The deal covers around 19,000 pensioners in the defined benefit, or final salary, pension scheme of the Scottish & Newcastle Pension Plan, a statement said on Monday.

"By hedging against longevity, we have reduced a significant amount of the Plan's risk should the overall life expectancy of members exceed our projections," said Neil Parfrey, UK head of pensions at Heineken.

Is this to do with how long people are living?

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Yes, it is an insurance policy against their pension members living longer than is currently allowed for in their scheme liability calculations.

Lots of firms would like to like to do this but the market for such policies although growing is still tight and premiums expensive.

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Surely both these companies use the same/similar calculatirs ?

So how do they come to a price ?

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yes

there is a bit more about it here

http://www.professionalpensions.com/professional-pensions/news/2425814/heineken-breaks-new-ground-with-gbp24bn-aviva-longevity-swap

without knowing the 'undisclosed portion' or the fee, it is hard to judge

for heineken it takes away some risk of pensioners living longer than the scheme expected

for aviva it is a chance to make a few bob on the fund and the fee and if people only live as long as the scheme expected (or shorter)

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Gamble on both sides - and those constructing the deal and selling it - will no doubt be getting 6-7 figure bonuses.

Fizz all round - hurrah !!

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Surely both these companies use the same/similar calculatirs ?

So how do they come to a price ?

They will likely use similar data and models and come up with a similar answer for the most likely life expectancies for the members, although I'm sure there is some to-ing and fro-ing before a price is agreed.

The key part of the transaction is the transfer of risk. Heineken will now have certainty as to how long they will be paying pensions for, regardless of how long their pensioners actually live for.

Aviva have taken on this risk (both upside and downside). Inevitably they will charge a fee for this. If the members live much longer than expected then in theory they could lose out on the deal. However their models will make some allowance for this with probably some quite pragmatic assumptions.

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Aviva will reinsure the risk in the reinsurance market, hence covering themselves against future adverse experience. The premiums for these contracts are typically 4-5% of the liability values, so say c£100-120m based on liabilities of £2.4billion. Premium is payable over the lifetime of the contract. 4-5% will reflect insurer capital reserving requirements, profit and expense margins.

The irony of these contracts is that they don't typically cover the riskiest liabilities, which are those for the youngest non-retired members.

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What's going to happen to pension companies when they discover the elixir of youth? They are making real inroads into the reversal of ageing now - some people think that they will crack it within a decade or less.

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