The Scottish Hydro-Electric Pension Scheme (“SHEPS”) has completed a transaction to convert its longevity insurance into a buy-in contract with Pension Insurance Corporation plc (“PIC”). The transaction further reduces risk, increases benefit security for all members and reduces pension scheme volatility for the scheme’s sponsor, SSE plc (the FTSE 100 energy company).

The transaction is the latest step in the Trustee’s long-term de-risking strategy. Working with the scheme’s sponsoring company, the Trustee had previously hedged all longevity risk in their pensioner population through a combination of a £250m buy-in with PIC and a £800m longevity insurance with Legal & General. As the funding position of the scheme improved over time, the Trustee was then able to take the next step in risk reduction by converting the longevity insurance into a buy-in.

Longevity insurance conversions are rare, but they are a growing trend as pension schemes mature and de-risk their investment strategies. This is further evidence that converting longevity insurance into a buy-in is a viable option, with this transaction demonstrating that, even if the longevity insurance is provided by one insurer, trustees can retain full flexibility over the eventual buy-in provider. Through this transaction the longevity reinsurance behind the longevity swap remained in force and transferred over to PIC.

Hymans Robertson was lead advisor on the transaction, with Shepherd and Wedderburn advising on the structure and providing legal advice on the transaction to the Trustees.

Graham Laughland, Chair of trustees for the Scottish Hydro-Electric Pension Scheme commented: “I am delighted that the trustees have been able to take another step in reducing risk and improving the security of members’ benefits. This buy-in extends the insurance we have in place and provides the scheme with an income stream that matches in all material respects the pensions currently being paid.  We have been very impressed with the way Hymans Robertson and Shepherd and Wedderburn have negotiated, structured and implemented a unique transaction for us. A very smooth process from my perspective.”

Richard Wellard, partner at Hymans Robertson added: “It was really enjoyable working with the Trustee and SSE though this project. They have a clear set of objectives for the pension scheme and this allows us to identify when transactions will add real value in achieving those objectives. Forty longevity swaps have been put in place by pension schemes and this is the fifth conversion into a buy-in. The process of converting a longevity swap to a buy-in is more complex than implementing a buy-in from scratch, but we expect more schemes to follow this path as they become better funded and look to lock down risk.”

Andrew Holehouse partner at Shepherd and Wedderburn commented:  “The conversion of a longevity swap is legally complex and we were delighted to advise the Trustee and negotiate a legal structure to deliver the conversion and secure the Trustee’s objective through increased de-risking.  Longevity swaps are a stage on the de-risking route and we are very pleased to be at the forefront of the process of early conversion to buy-in.  This transaction illustrates that conversion of longevity swaps to a buy-in is an option open to well-funded schemes and that the legal processes can be successfully managed.”

Tristan Walker-Buckton, Head of Pricing at PIC commented: “The Trustees of SHEPS have been a valued client of ours since 2016 and we are delighted to have been able to help them further de-risk their pension liabilities. Converting a longevity swap into a buy-in is not straightforward but it is an increasing trend. It shows that trustees are keen to extend their de-risking programme beyond longevity risk and into a buy-in or buyout, giving them fuller coverage and a simpler proposition to manage long-term.”