Deutsche agrees record longevity swap deal

The swap, announced during Aegon's results this morning, is significant for two reasons - its size, and the fact that Deutsche says it has managed to pass its resulting exposure to longer Dutch life expectancy on to third parties - anonymous financial investors in the capital markets.

These might include other banks, hedge funds, or specialist insurance-linked securities funds, all willing to bet that Aegon's provisions for rising Dutch life expectancy are, in fact, too high. Deutsche is understood to have "packaged" its exposure from the Aegon deal into various kinds of investment products for these institutions to buy.

Usually, when banks and insurers sign longevity deals, they subsequently pass the risk onto reinsurers - firms that specialise in covering insurers. But capacity in this market is limited.

The €12bn swap also contains an irony for Aegon, since the Dutch group had once set out its own plans for entering the related "pensions buyout" market in the UK. Aegon launched a joint venture with Swiss bank UBS in late 2008 to do this, but rethought the plans in June 2010, following a restructuring of its UK life business.

Deutsche, meanwhile, arrived in pensions swaps with a bang in January 2010, signing a £3bn longevity deal with BMW on behalf of its £5bn UK pension fund. It owns a UK insurance subsidiary, Abbey Life, through which these transactions tend to be structured.

Its deal with Aegon today is also one of first large, public longevity swaps to take place outside the UK. Most of those to date have involved UK pension schemes, such as those for BMW, Rolls-Royce and ITV.

In a statement, Clare Hennings, head of structured insurance solutions at Deutsche, said: “We believe this market will continue to grow as insurance companies and pension funds look at new ways to manage their liabilities, while investors seek diversified investment opportunities."

Aegon said this morning that the swap "reduces required capital at an attractive cost of capital", and these deals can be positive for companies' share prices. Figures from City law firm Freshfields, released late last month, suggested companies who reduce financial risks in their pension schemes enjoy an average 2.1% boost to their shares.

Yesterday, the UK defence group BAE Systems reported a £1.5bn write-off related to the deficit in its pension funds, equalling its 2011 pre-tax profits. The loss is a paper one, but gives an indication of what could be a bruising valuation of its £9bn main scheme that is currently underway. If a big deficit is revealed BAE's cash payments could be in line for an increase.

BAE's shares were down 7.8p to 325.2p yesterday, though the market was also disappointed by the firm's poor trading prospects.

Aegon's deal does not affect its pension scheme, but the life-expectancy risk in its annuity book is similar. Its shares were up 0.2% to €3.95 this morning, as of 11.21am GMT.

• Separately, Aegon also said its UK chief executive, who leads the substantial UK operations that the Dutch group inherited from its acquisition of Scottish Equitable in 1994, would be joining its group management board.

Adrian Grace's promotion is a "a reflection of the continued importance our business in the UK represents within our strategic priorities" according to group chief executive Alex Wynaendts.

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Deutsche agrees record longevity swap deal