Converting a pensioner longevity swap into a buy-in is no easy task, but LV= has proved such transaction can be done.

In 2020, Liverpool Victoria Financial Services (LVFS) converted a longevity swap held with ReAssure (reinsured by Swiss Re) into a £800m ($1.1bn) buy-in with Phoenix Life.

Due to its large size relative to LVFS's balance sheet, the staff pension scheme has caused significant volatility in LVFS's Solvency II capital position and brings the risk of increased future employer contributions.

For LV=, a buy-in was identified as the best risk transfer solution, provided the price was attractive.

There were challenges with the transaction. For instance, the pensioner longevity risk was already hedged in 2012 through the swap, which increased complexity. There was also significantly increased demand for buy-ins, which could make complex transactions less attractive to insurers.

In addition, there was significant market volatility caused by the outbreak of Covid-19, which could have affected the transaction.

LVFS worked with its advisers LCP to devise a bespoke buy-in broking process, aimed at maximising insurer engagement, price competition and execution efficiency. A "price lock" mechanism and asset transition programme were designed to weather the market volatility and save millions of pounds in transaction costs.

James Pratt, capital efficiency and asset reporting manager at LV=, admits the transaction was relatively complex, but adds: "There can be significant benefits compared to retaining a swap - passing investment risk from the scheme to the buy-in provider, and taking another step towards buyout.

"Timing can be an important factor as market conditions determine whether a swap conversion will have a beneficial financial impact."

LV= expects more of these kinds of transaction in the near future and said the conversion "provides an important precedent in risk transfer solution and process design".