Use Of Longevity Swaps And Buy-Ins
And Other Unforced Errors
Game Set and Match to the Life Insurers
The Example of Aviva Plc: Life Insurer and DB Sponsor
Strong Margins. Buried Losses
Life Lessons For Us All
This is the first and still one of the most remarkable article from William McGrath on the impact of life insurers on pensions.
This article is now three years old but still most important.
“Use of Longevity Swaps and Buy-Ins, and Other Unforced Errors”
Life Insurers as DB Sponsors: The Example of Aviva Plc
Life Lessons For Us All
The Pension Risk Transfer industry is powerful and profitable. Consultants and life insurers are proud of their very profitable high growth operations. Yet the track record of completed transactions has received minimal scrutiny. It is dreadful when looked at financially from member and sponsor perspectives.
C-Suite Pension Strategies is updating its recent paper “Use of Longevity Swaps, Buy-Ins and Other Unforced Errors” for the 2022 results season. It shines some light in on actuarial and investment consultancy magic.
One company covered is Aviva plc – noteworthy because it has large pension schemes and is itself a life insurer. It illustrates financial and disclosure issues.
Aviva has a market capitalisation of £11.5bn. Its pension schemes had a £0.8bn surplus on assets of £10.8bn at 31 December 2022. That is down from a £2.3billion surplus on assets of £19.3bn at 31 December 2021. Since 2019 it has taken to transferring money from its pension schemes to Aviva plc. As they are related party transactions, data can be gleaned from two angles in the notes to the Financial Statements. Some of the regulatory arbitrage can be seen. It has also had a large longevity swap of its own and is selling buy ins in and life insurance in which longevity data is a key feature in pricing.
Buy Ins
The Aviva schemes (Scheme) between 2019 and 2022 paid Aviva Plc £6.3bn over 7 buy-in transactions. The scheme investment losses of £2bn on the deals are taken “below the line” away from key earnings calculations as part of “Other Comprehensive Income”. Meanwhile, on the same deals Aviva Plc booked immediate profits of £1bn. A 31% hit and a 17% profit on the same £6.3bn transfers.
In the 2022 accounts the scheme liabilities, which had a value on transfer of £4.3bn, are shown as worth £2.9bn. From the Aviva Plc perspective the liabilities are shown as being £3.4bn.
| ASPS £m | Premium Paid | Recognised plan assets | Loss taken to OCI |
| 2022 (2 buy-ins) | 1324 | 891 | 433 |
| 2021 (3 buy-ins) | 2456 | 1760 | 696 |
| 2020 (1 Buy-in) | 873 | 579 | 294 |
| 2019 (1 buy-in) | 1665 | 1126 | 539 |
| 6318 | 4356 | 1962 |
| AVLAP £m | Premium received | Recognised Gross insurance liabs | Implied profit |
| 2022 (2 buy-ins) | 1324 | 1001 | 323 |
| 2021 (3 buy-ins) | 2456 | 2184 | 272 |
| 2020 (1 Buy-in) | 873 | 737 | 136 |
| 2019 (1 buy-in) | 1665 | 1334 | 331 |
| 6318 | 5256 | 1062 |
So, £6.3bn of assets were transferred to Group to meet what are now £2.9bn of liabilities – with further reductions expected to come from reduced life expectancy assumptions when they are adopted later this year. An explanation for the transactions and what they have achieved for whom might be expected.
Experience in 2022
At 31 December 2021 Aviva UK schemes’ assets were £18.8bn. This is net of a negative £3bn which is probably largely longevity swaps. Of those assets were £17.5bn in bonds; £4.2bn in pooled investment vehicles; no equities; negligible properly and a negative £4.4bn in repurchase agreements. A year later bonds were £8bn, down £10bn or 56%. The pooled investments were £1.7bn, down £2.4bn or 59%. Repurchases had fallen to £0.6bn from £4.4bn.
Overall a negative £1.5bn was taken to Other Comprehensive Income (no earnings impact). The liabilities had fallen by £6bn because of the 2.7% increase in ‘AA’ discount rates used to measure the liabilities.
The Aviva scheme is unusual in 2022 in that its asset values fell more than its liabilities and the surplus fell. Shareholders might expect more on that subject.
Looking ahead the scheme still has to find £570m a year to pay pensioners. This is now a much higher proportion of the schemes’ assets. How much protection LDI provides will be come clear. A confidence statement is appropriate that the cash flow is robust and that forced selling of assets at reduced prices will not be needed. It is of note that Friends Provident, one of Aviva Plc’s schemes, had collateral related cash flow difficulties in 2022 during the LDI crisis and needed a £88m parent company loan – £26m of which had not been repaid at the year end..
Longevity Swaps and Provisions
The Aviva schemes have long used particularly high life expectancy assumptions. The 2022 accounts show a 40 year old man can expect to live for 89.3 years and a 40 year old women will live for 91.4 years These high assumptions will probably have impacted the value of both the longevity swap and buy-in transactions. They will have reduced the write down taken by the scheme up front and left value for the Group to take when downward revisions follow. Here again transparency is not a priority in the accounts.
In 2014/2015 Aviva schemes undertook £5.6bn in longevity swaps. The only 2021 and 2022 accounts reference to these swaps is in a hash negative number of “cash and other” of (£3bn) and (£1bn) respectively in tables of the scheme assets. Those volatile material amounts are set against assets of £20bn in 2021 and £11.3bn in 2022. Who holds the longevity risk now and whether it is still covered by a Solvency II regulated insurer is not addressed. Longevity Reinsurance is well known to attract large life funds managed off shore.
Aviva’s Group accounts show it is well aware that trends have shifted downwards in life expectancy. In both 2021 and 2022 it makes substantial provision releases to profit from its life insurance books. What were the assumptions used in the buy ins is a reasonable question for shareholders and scheme members.
| December | 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 |
| Male at 60 | 87.9 | 88.0 | 88.0 | 88.2 | 88.8 | 88.9 | 89.0 | 89.8 |
| Female at 60 | 89.6 | 89.7 | 89.8 | 89.6 | 90.2 | 90.3 | 90.2 | 90.8 |
| Male at 40 | 89.3 | 89.6 | 89.4 | 90.0 | 90.7 | 91.1 | 91.4 | 91.7 |
| Female at 40 | 91.4 | 91.8 | 92.0 | 91.9 | 92.5 | 92.5 | 92.8 | 92.6 |
| Impact on Present Value of DB obligation | £m | £m | £m | £m | £m | £m | £m | £m |
| All members one year younger | 308 | 680 | 714 | 613 | 536 | 565 | 606 | 396 |
Implications for Aviva Life§ With buy-ins, pension schemes take big hits shown below the line in sponsors’ accounts and life insurers make instant profits. Aviva’s 2022 results celebrate “very strong margins on risk transfers”. § Coming reduced life expectancy assumptions will make the costs of Risk Transfers undertaken in recent years look even worse. Whether the changing views of life expectancy were shared on recent bulk transfers with third parties is a question. § The Risk Transfer Industry publicises its transactions and issues press releases with the parties involved, happily congratulation each other. Detail is limited. The value lost to members and sponsor is not covered. Investors and members have switched off and straight forward analysis is not getting done. § For Aviva trustees there is the additional question of why, if Aviva is covered by the insurance industry compensation scheme anyway, it is in member interests to transfer assets at all from one regulatory regime to another. Surpluses can explicitly, it notes, be used to fund DC contributions. Good idea. § Less gusto, more analysis is needed from The Risk Transfer Industry. Group accounts need far better notes and explanations.
Aviva is an example of what happens when a company and a sector is left too long to its own devices. The Risk Transfer Industry’s capture of language for its “Gold Standard, derisking, endgame solutions” has served it well. A result is it receives very little scrutiny given the large sums involved and the major transfers of value undertaken. That should change. The risk transfer industry should provide an evidence base of the immediate and continuing impact of their deals. The work should cover profitability; regulatory arbitrage: accounting obfuscation; information asymmetry; forced selling to meet cash payments as well as the benefits of derisking.
Life insurers and leading actuarial consultants advising schemes and sponsors should provide an evidence base. |
Appendix
Scheme Surplus
Regulatory Arbitrage : Accounting obfuscation
Related Party Transaction Note 61. Page 3.139
“the difference between the premiums and the gross liabilities implies profit driven by the measurement bases used to calculate the premium and the accounting value of the associated gross liabilities.”
“……The difference between the plan assets recognised and the premium paid being recognised as an actuarial loss through Other Comprehensive Income.”
Revenue from Buy-ins
“Present value of new business premiums (PVNBP) measures sales in the Group’s life insurance business. PVNBP includes 100% of single premiums from new business written in the financial period.”
Changes in life expectancy: Profit benefitting changes
“In 2022 there has been a reduction in reserves due to longevity.” (primarily tapering of improvements for the over 85)
“In 2021 there was a reduction in reserves due to longevity assumptions.” (primarily closing the gap between annuitants and the general population)
“In 2020 the impact of mortality for annuitants contract arose from update to base mortality to reflect experience changing the rate of mortality improvements for males.”
Effectively Aviva stole the pension scheme assets.
The same has occurred more recently with Standard Life https://henrytapper.com/2026/07/26/standard-life-insures-its-own-staff-pension-scheme-did-the-trustee-find-standard-lifes-covenant-weak/
Does not the same theft apply to other DB Pension Scheme funded to buy-out level purchasing bulk annuity policies. Are member benefits and the interests of the employer truly protected by the transfer of assets to an insurer rather than being used to pay the pension benefits of past, current and future employees?
A fundamental question that is not being asked, but which is a key part of the Trustees Fiduciary Duty and on which the Regulators appear silent.