Reducing and/or eliminating risk is increasingly on the agenda for both trustees and sponsors of pension schemes.

The current economic climate means trustees can't ensure that members of their pension scheme will receive their promised retirement benefits in full. As a result, the U.K. market has responded with various solutions to help pension schemes reduce risk.

“The introduction of the longevity swap as an additional tool in the armoury of pension
scheme trustees is a welcome addition," said Ritesh Bamania, head of asset liability
investment solutions U.K. for UBS Global Asset Management. “In an environment where cash resources are constrained, the swap provides an ability to reduce a key risk — the risk of people living longer — without the need for making any upfront contributions."

Bamania said that the two clear advantages of such a swap are that there is no upfront payments (as the payments required are simply the net payments in the future based on the comparison of the fixed payment and the actual pension payment) as well as the ability to allow for the actual pension payments and characteristics of the scheme rather than using proxies which introduce potential mismatch risk. The client has the added benefit of reducing the uncertainty related to future payment.

"The current environment provides various challenges to reduce risk and any solution that provides risk reduction without any upfront costs is bound to receive significant attention," Bamania said. "There are views in the pensions industry that the longevity swap market may see transactions of £1 billion ($1.54 billion) to £2 billion in 2009."

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