The problems facing pension funds that want to novate – or alter – their longevity swap arrangements as part of a subsequent buyout gives established players such as Legal & General a distinct advantage, according to Simon Gadd, managing director of the insurer's annuity business. Legal & General's membership of the Life & Longevity Market Association, which launched earlier this month, gave a clear indication of its decision to move into the longevity swap market – a stance it confirmed publically today. Gadd says Legal & General's decision followed a period of research over the market's likely size and the company's potential role within it. He said one key advantage it identified was in regard to schemes that buy a longevity swap as part of a "stepping stone" to buyout. Gadd echoed earlier warnings from both The Pensions Regulator and fellow bulk purchase annuity stalwart Prudential over the potential for longevity swaps to act as a barrier to a subsequent move to buyout. "The first questions trustees should be asking – and in my experience have been asking – is, ‘What happens if I take out a longevity swap now and then in ten years' time I want to move to a full buyout? What terms will you [the swap provider] give me?'," he says. The managing director said that, if a scheme wanted to then conduct a buyout with Legal & General, the swap clearly posed no problem. But if the scheme decided to transact with a third party it was left with two options – either cancel, which in most cases would prove expensive, or novate the deal so that the two counterparties on the swap would be Legal & General and the buyout insurer. Gadd said that, in the second instance, pension schemes holding longevity swaps with Legal & General would have a distinct advantage over newly established, non-rated players. "I can't say definitively, but I can certainly give a strong indication that Legal & General would be unlikely to accept a longevity swap from an unrated provider as an asset in a buyout due to the counterparty risk involved. So a buyout with Legal & General would require a scheme to surrender any such swap." Gadd cited recent examples of unnamed schemes that were unable to proceed to a full buyout due to holding exotic interest rate and inflation swaps as part of their portfolio as proof of the problems derisking approaches could cause. Unlike its traditional longevity exposure through individual, and bulk, annuities which is kept on its books, Gadd said Legal & General intended to offload most of its longevity swap risk to reinsurers. "We don't have an unlimited appetite for longevity," he said. ...
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