Royal Berkshire becomes first local government pension scheme to hedge out longevity risk

The Royal County of Berkshire Pension Fund has become the first local government pension scheme (LGPS) to enter an insurance contract designed to hedge out its longevity risk.

The transaction with Windsor Life, a subsidiary of Swiss Re, covers 11,000 pensions in payment on 31 July 2009, worth around £750m. This is only the third contract of its type entered into the UK.

The deal is intended to reduce the fund’s exposure to the risk posed by potential increases in longevity rates, a significant risk for all defined benefit pension schemes. As a result, the financial risk of members of the scheme living longer than expected is transferred to Swiss Re.

Nick Greenwood, pension fund manager for the Royal Borough of Windsor & Maidenhead, said: “We have been looking at the fund’s risk profile for some time. With our lawyers, we believe we have achieved an innovative solution to one of the biggest issues for pension funds today, namely the uncertainties around longevity trends.”

Mark Womersley, pensions partner at Osborne Clarke and advisor to the Royal Berkshire fund, said: “This is a ground-breaking transaction and many other pension funds will be watching keenly to see if they can adopt a similar measure. From a legal viewpoint, this was a complicated contract, made all the more interesting by being the first carried out by a LGPS fund. With 2010 valuations on the horizon, it is a step that other LGPS funds would do well to consider.”