Royal Berkshire fund agrees first public sector longevity hedge

The £1.2 billion Royal County of Berkshire pension fund has reached an agreement to hedge out a portion of its longevity risk according to Nick Greenwood, pension fund manager for the scheme.

In an exclusive interview with Life & Pensions, Greenwood said Berkshire has agreed pricing for an uncollateralised longevity hedge – subject to accepting terms and conditions – which will cover the 10,400 members in payment, or around 43% of its liabilities. He says there are no remaining barriers to the deal being signed.

It would be only the second pension scheme longevity swap agreed, following the deal by Babcock International earlier this summer, and the first conducted by a public sector fund.Greenwood declined to confirm who the swap is with but market sources have suggested it is Swiss Re. According to a highly placed figure in the buyout sector this was a result of Berkshire's trustees requirement that a deal be done with a marquee name.

"You can't imagine the Royal Berkshire pension scheme coming out an announcing that it has agreed a longevity swap with the XYZ Insurance company, so it is no surprise they opted for such a well known name".

Swiss Re declined to comment.

In addition to de-risking its longevity exposure, Berkshire has also agreed in principle to form a bespoke special purpose vehicle with an unnamed UK investment bank, to implement an interest rate and inflation hedging strategy.

Greenwood said effective risk management has been a high priority for the fund over the past year. "We've done this from a sensible risk management point of view at a cost we think is acceptable. We've spent most of the year looking more at risk [in the fund] than investments," he says.

He said the scheme has moved away from the traditional 70:30 equity and bond allocation used by many of its peers in the public sector, to a more diversified and risk-aware approach, in which hedging strategies are a natural progression.

In July 2008, the scheme placed about half of its assets, or around £600 million, out to tender in alternative asset classes, including an allocation of £70 million to emerging market debt, £90 million in infrastructure, £105 million in absolute returns strategies, a £50 million active currency mandate and £150 million in commodities.

The full story can be found in the December issue of Life & Pensions.