Longevity Swaps

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Andrew Birkett, group pensions manager, Babcock Intenrational Group plc

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Longevity Swaps

  1. 1. LONGEVITY SWAPS Andrew Birkett September 2010
  2. 3. Who is Babcock International Group plc ? <ul><li>Top FTSE 250 engineering support services company </li></ul><ul><li>Recent acquisition of VT Group </li></ul><ul><li>Have long term contracts with our customers who own large strategically important assets, typically Government or public bodies </li></ul><ul><li>Operates in three divisions in UK </li></ul><ul><ul><li>Marine; UK’s leading Naval support business for the Royal Navy and MoD </li></ul></ul><ul><ul><li>Defence; Largest provider of facilities management support to MoD </li></ul></ul><ul><ul><li>Support services including </li></ul></ul><ul><ul><ul><li>Rail; the largest track renewal contractor for Network Rail </li></ul></ul></ul><ul><ul><ul><li>Nuclear; largest specialist nuclear resources in UK </li></ul></ul></ul><ul><ul><ul><li>Networks; one of 3 key suppliers to National Grid </li></ul></ul></ul><ul><ul><li>25,000 employees </li></ul></ul>
  3. 4. DB Scheme Information <ul><li>At the time </li></ul><ul><li>5 UK final salary schemes with pension liabilities c£2bn </li></ul><ul><li>Market capitalisation of c£1.4bn </li></ul><ul><li>Pensions identified as a key risk to the business </li></ul><ul><li>3 largest schemes </li></ul><ul><ul><li>c14,500 pensioners </li></ul></ul><ul><ul><li>Pensioners liabilities c£750m (40% of total) </li></ul></ul><ul><li>Key risks for pensioner liabilities </li></ul><ul><ul><li>Longevity </li></ul></ul><ul><ul><li>Inflation </li></ul></ul><ul><ul><li>Interest rate </li></ul></ul>
  4. 5. Actual or synthetic buy in? <ul><li>Did not have governance structure to hedge investment risk consistently so </li></ul><ul><ul><li>Phase 1-hedge longevity </li></ul></ul><ul><ul><li>Phase 2-put in place effective governance structure </li></ul></ul><ul><ul><li>Phase 3-hedge interest rate and inflation risk </li></ul></ul><ul><li>Carried out detailed mortality assessment for pensioners </li></ul><ul><li>Schemes ranged from standard tables with age rating of +0.5 to +3 </li></ul><ul><li>Obtained indicative quotes for buy in and longevity swaps </li></ul><ul><li>Actual buy in </li></ul><ul><ul><li>Have to pass over assets so less opportunity to improve funding levels </li></ul></ul><ul><ul><li>Security was key issue for trustees </li></ul></ul><ul><li>Chose synthetic buy in </li></ul>
  5. 6. LONGEVITY SWAP STRUCTURE Pensioner Pension Scheme Credit Suisse Reinsurers / Investors Monthly pension for life <ul><li>Under the swap </li></ul><ul><ul><li>The Pension Scheme pays Credit Suisse the expected pension payments (the “fixed leg”) for 50 years based on expected longevity </li></ul></ul><ul><ul><li>Credit Suisse pays the Pension Scheme the expected pension payments (the “floating leg”) until the pensioner dies (actual longevity), or 50 years if later </li></ul></ul>
  6. 7. Longevity swap-key issues for Babcock <ul><li>Trustees </li></ul><ul><li>Advisers </li></ul><ul><li>Security of contract </li></ul><ul><li>Flexibility of contract </li></ul><ul><li>Funding implications </li></ul><ul><li>Accounting implications </li></ul>

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