BT hedges pension plan liability as retirees live longer

Largest British defined benefit plan strikes record deal with Prudential Insurance


BT Group has added longevity coverage for its £40 billion pension fund in case its members live longer than expected.

The deal is the biggest single longevity risk transfer deal on record, surpassing Aviva, which stuck a similar deal with Swiss Re Munich Re and Scor in March to reinsure £5 billion of liabilities.

The longevity policy gives long-term protection to the plan, Britain’s largest phone group said in a statement today. The policy won’t require the company to make additional contributions for the UK’s biggest defined benefit plan, it said.

The announcement comes as BT is reviewing its plan that pays more than than £2 billion to members every year. BT may report a funding deficit, before tax, of £8.1 billion as of June, analysts at Macquarie Research said in a note in May.

That would mean the company making payments of as much as £770 million a year, more than double the current figure, Macquarie said.

“We expect more schemes to follow suit using this cost effective option,” Ben Stone, a pensions risk specialist for PricewaterhouseCoopers said in an e-mailed statement. “Hedging life expectancy risk in this way could become the norm.”

The risk for longevity has been reinsured with the Prudential Insurance Company of America.

The arrangements cover more than 25 per cent of the plan’s exposure to longevity, or about £16 billion of its liabilities, BT said.

BT created its own insurance company as part of the transaction, giving the company wider access to the global insurance and reinsurance market.

“We expect to see this kind of structure replicated by several other schemes in the near future,” said James Mullins, head of risk transfer solutions at Hymans Robertson, who advised Prudential on the transaction. “We are seeing first-hand the continued strong appetite that global reinsurers have to take on UK longevity risk.”

Companies are increasingly looking to transfer costly pension liabilities to third parties as people surpass the lifespans that companies projected when they set up defined benefit pension plans decades ago.

Akzo Nobel’s ICI Pension Fund, which it inherited through its $17 billion purchase of Imperial Chemical Industries in 2008, struck a £3.6 billion bulk annuity deal with Legal & General and Prudential Retirement Income in March. – Bloomberg