(Corrects para 3 to show it has secured reinsurance from
* 16 bln pound deal the biggest in the UK
* Hedges more than a quarter of scheme's old-age risk
* Takes total UK issuance to nearly 50 bln pounds - Aon
By Kate Holton and Simon Jessop
LONDON, July 4 The trustees of BT Group Plc's
pension scheme have taken out insurance against the costs
associated with members living longer than expected, in the
biggest such deal of its kind in Britain.
BT, a former state telecoms group, has 320,000 members in
its scheme, making it the country's largest private sector
defined-benefit pension plan, which requires annual top ups from
the parent company.
The trustees said on Friday they had created their own
insurance company and secured reinsurance from the Prudential
Insurance Co of America. The arrangements will cover
25 percent of the scheme's total exposure to people living
longer, or 16 billion pounds ($27 billion) of the scheme's
Chairman of the Trustees Paul Spencer said in a statement
the deal was groundbreaking in terms of size and structure.
The risk that some pension schemes would be unable to meet
their obligations to pensioners has become particularly acute as
people live longer.
The International Monetary Fund estimates that for each
extra year of life expectancy, current liabilities in a typical
defined benefit pension scheme increase by 3 to 4 percent.
That means companies may have to find billions of extra
pounds and carry the risk of making a mistake in their
calculations on their balance sheet.
But a so-called longevity swap - such as BT's deal - helps
to insure against that risk. Under these schemes, a pension fund
makes regular payments to a third party, typically an insurer,
reinsurer or investment bank, based on agreed expected mortality
rates among the scheme's policy holders.
The third party then agrees to take on the risk that those
figures were underestimated and is liable to pay out to policy
holders based on actual mortality rates.
British companies have led the way in setting up such deals.
Insurer Aviva in March this year agreed to transfer the
risk of members of its staff pension scheme living longer than
expected to three reinsurers.
Deals done since the first one by engineering contractor
Babcock in May 2009 total nearly 32 billion pounds. That
figure has grown by half as much again as a result of the BT
deal, data from consultants Aon Hewitt showed.
And more deals are expected.
Matt Wilmington, partner at Aon Hewitt, which advised on the
deal, said: "We have been talking for a number of months about
the increasing capacity and appetite of the global reinsurance
market to take on pension fund longevity risk.
"2014 has already been a record year for risk settlement
transaction volume and we expect a number of further
transactions to add to the growing list of those completed."
BT said at the end of March its pension scheme had
liabilities of 46.7 billion pounds and assets of 40 billion
pounds. The company said the deal would not affect how much it
pays into the scheme, although that is likely to increase when
the latest review is completed, which is expected to be next
BT currently pays annual deficit payments of 325 million
pounds and analysts believe this could increase to nearer 500
million pounds following the next review. The triennial review
began on June 30 and often takes around 9 months.
($1 = 0.5877 British Pounds)
(Editing by James Davey and Jane Merriman)