JP Morgan has taken on 70 million pounds ($113 million) of risk posed by people living longer than expected, in the first deal to hedge against higher life expectancy for a company pension plan's working members.
JP Morgan said on Tuesday the swap contract with the Trustees of the Pall UK Pension Fund was based on future values of its LifeMetrics longevity index -- a toolkit for measuring longevity and mortality risk in England and Wales, United States, Netherlands and Germany.
"Index-based hedges are particularly well suited to hedging the longevity risk of pension plans with significant deferred and active members," David Epstein, head of longevity structuring at JP Morgan, said.
JP Morgan is the hedge provider and collateral custodian for the deal, which was structured by investment manager Schroder, to cover the British pension scheme liabilities related to about 1,800 members, with assets of 120 million pounds.
Only a handful of longevity swaps have been formatted to work for a pension scheme in Britain -- around 8 billion pounds in the past five years, according to specialist insurer Pension Insurance Corporation.
The biggest so far involved German car maker BMW) last December offloading 3 billion pounds of risk from its British pension scheme to Deutsche Bank's insurance subsidiary Abbey Life.
Previous longevity deals have focused soley on pension plan members who have already retired, as hedging against increased life expectancy of members still working has been difficult to measure, JP Morgan said.
The index-based longevity swap with the Trustees of the Pall Pension Fund, which is part of global manufacturer Pall Corporation, has a 10-year term, in which the fund's trustees can choose to adjust the size or structure of the deal. If the life expectancy improves at a greater rate than specified in the contract, the fund receives an insurance payout.
JP Morgan are backing the Life & Longevity Markets Association, an organization of investment banks, insurers, brokers and pension providers set up last year to construct capital market instruments to slice longevity risk into tradable portions.
The first longevity risk bond was issued by Swiss Re in December, which passed on $50 million of its own longevity exposure to the capital market in a bond format.
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