UK's Aviva offloads pension fund longevity risk in record deal

* 5 bln stg longevity swap is largest ever

* Brings total issuance to 30.1 bln stg

By Jemima Kelly

LONDON, March 6 (Reuters) - British insurer Aviva (Other OTC: AIVAF - news) has agreed to transfer the risk of members of its staff pension scheme living longer than expected to three reinsurers for 5 billion pounds ($8.4 billion) in the largest deal of its kind.

Aviva's transaction by itself represents more than half of the total 8.9 billion pounds of longevity swaps in 2013 and is substantially larger than the previous 3.2 billion pound record set by BAE Systems (LSE: BA.L - news) last year.

Longevity swaps, which involve a final-salary pension scheme hiving off the risk that it will have to pay pensioners for longer than expected, have become a growing market because statisticians have consistently underestimated life expectancy.

Aviva told Reuters on Thursday that the deal was agreed with Swiss Re (Other OTC: SSREF - news) , Munich Re and SCOR.

The swap is the first of 2014 and lifts total issuance since the first deal in 2009 by 20 percent to 30.1 billion pounds.

"The trustee is delighted to have taken another important step in our ongoing process to improve further the level of security of all our members' benefits," Ian Prosser, chair of trustees for the Aviva Staff Pensions Scheme, said in a statement.

Longevity swaps provide a way for reinsurers, which help shoulder risks faced by insurance companies in exchange for profit, to offset the risk of early death they take on through the writing of life insurance.

COMPELLING RATIONALE

"There is a compelling rationale for pension plans and insurers to transfer their longevity risk to reinsurers," said Daniel Harrison, head of longevity solutions at Swiss Re.

"We have a natural offset with our mortality business (and) the capacity to write the business onto our balance sheet."

But longevity swaps could also attract a broader range of investors, such as hedge funds and sovereign wealth funds, which may see the market as a chance to diversify because of its lack of correlation with other asset classes.

Andrew Ward, who advises pension scheme trustees for consultancy firm Mercer, said he is in talks with risk-takers outside the reinsurance market, which has so far taken on all the risk in longevity swaps.

Ward also said there are a number of multibillion-pound deals in the pipeline, including, for the first time, pension schemes in countries other than Britain.

Sidley Austin, which advised Munich Re, said the German company was the lead reinsurer in the transaction, though Aviva (Berlin: GU8.BE - news) declined to disclose details on how the deal was split.

The transaction was brokered by Linklaters and Hymans Robertson.