ITV has put in place a contract with Credit Suisse, the investment bank, aimed at limiting the broadcaster’s losses in case members of its defined benefit pension scheme live longer than expected, the company said.
The deal is understood to be the first in recent years to use a “longevity swap” arrangement with an investment bank rather than relying on the insurance market to either offload liabilities through an annuities contract or “buy in” protection with an insurer.
Raj Mody, pensions partner at PwC who advised on ITV’s deal, said he expected other large employers to try to find similar arrangements that seek to limit specific risks associated with rising life expectancy – a risk most employers could not have imagined at the time they created defined benefit pension schemes several decades ago.
So far, roughly £30bn ($49bn) in liabilities of UK pension schemes have been shielded from longevity risk, mostly through the use of insurance products. However, that is a fraction of the roughly £1,000bn in liabilities that represent pension promises made by employers.
ITV gave no details of the arrangement except that the longevity swap contract will increase the deficit of its pension scheme by £50m. According to its 2010 annual report, the scheme had a shortfall of £313m at the end of December 2010 on total liabilities of £2.75bn.
The group has been dogged by questions about how it would manage its pension deficit for many years.
The swap is estimated to apply to £1.7bn of the existing liability portfolio and will cover scheme members who have already reached retirement age. The scheme has a final maturity of 70 years but includes the option to be wound up earlier should all payments have already been made.
According to advisers familiar with the arrangement, the longevity swap is significantly less expensive than a buy-out or buy-in with an insurer because it does not require a transfer of assets to another party.
It simply provides for one-off payments annually should members live more than a year longer than projected. The scheme projects that men who retire at age 60 today will live a further 26.6 years and a further 21.7 years if they retire at 65.
Get alerts on Pensions crisis when a new story is published