Banks' Latest Pitch: Pension Hedging

Deutsche Bank Unit Takes On $4.65 Billion of BMW's So-Called Longevity Risk on U.K. Plan

By KATHY GORDON

LONDON—BMW AG's deal to unload £3 billion ($4.65 billion) of U.K. pension risk to Deutsche Bank AG's Abbey Life unit is likely to be followed by similar deals as companies seek affordable solutions to mitigate their pension problems, a potential cash cow for banks and insurers.



Company pension plans are increasingly problematic. Deficits have soared in recent years because asset values have fallen and people live longer than plans envisioned.



The BMW-Deutsche Bank plan, the largest of its kind in the U.K., comes as more banks and insurers prepare to offer longevity insurance. Firms already supplying such policies include U.K. insurer Legal & General Group PLC, Swiss Reinsurance Co., Credit Suisse Group, Goldman Sachs Group Inc. and UBS AG.

Pensions consultant and actuaries group Hymans Robertson said it expects more companies to agree to large longevity hedging deals this year. "We think the longevity swaps market will cover more than £10 billion of liabilities this year," up from £4.1 billion in 2009, said James Mullins, a longevity swap expert at Hymans Robertson.



BMW's U.K. deal means the German car maker has sold some of the longevity, or lifespan, risk on its U.K. plan. Abbey Life, in partnership with specialist pension insurance company Paternoster, are insuring the plan against the risk that around 60,000 retirees live longer than expected. BMW will pay a monthly premium for the insurance, while Deutsche Bank will spread the risk among a consortium of reinsurers, including Hannover Re AG, Pacific Life Re and PartnerRe.



Paternoster worked with Abbey Life to develop the longevity hedge for BMW U.K.'s pension plan, which at its last valuation in 2007 had a deficit of £584 million. The next triennial review is due to start in April.



One appeal of longevity hedging is that it doesn't require a major upfront cost, Paternoster business development executive Myles Pink said. Instead the company pays a monthly premium for the insurance.



One of the most active pension specialists, Pension Insurance Corp., expects the market for reducing the risks facing pension plans, whether through buy-ins, buyouts or hedging, will grow to £20 billion this year as companies seek to remove or at least share the pension risk after experiencing first-hand the volatile effects of the credit crisis.



Last year Credit Suisse insured £500 million of engineering group Babcock International Group PLC's pension liabilities, while Swiss Re did a similar £750 million deal with Royal County of Berkshire Pension Fund.



"We are aware of two other longevity swap deals worth well in excess of £1 billion which we expect to complete in the first half of 2010, subject to contracts," Mr. Mullins wrote in Hymans Robertson's quarterly pensions update issued last week.



Hedging part of a pension plan's risk reduces the costs compared with selling the entire plan to an insurer. A full buyout of a pension plan, in which a specialist insurer takes on all the assets and liabilities of a plan, removes a company's pension risk but can be expensive, especially if a plan has a deficit, as most U.K. pensions do.



Mr. Mullins said he believes companies that take out longevity swaps will use them as a stepping stone to further reduce the risks in their pension plans.