Longevity swaps used to hedge against the risk of defined benefit (DB) pension scheme members living longer than forecast are set to rise to at least a six-year record this year.
In its De-Risking Report 2026, adviser WTW forecasts that schemes are likely to undertake longevity swaps that cover more than £20bn of liabilities, the highest since 2020, and a combined £70bn of bulk-purchase annuity (BPA) and swaps transactions in the UK pension risk transfer (PRT) market this year, which would be a record.
The rise in interest rates since 2021 has had the effect of reducing the present value of DB schemes’ liabilities, increasing funding levels and making buy-ins and buy-outs a more affordable means of shifting risk from scheme balance sheets.
But interest rates are looking fairly sticky at present, so, what’s helped revive the longevity swaps market?
The most likely reason is the increasing appeal to sponsors of running on their schemes.
“It’s the next stage of de-risking for a lot of pension schemes,” said Matt Wiberg, London-based Bulk Annuity and Longevity Hedging Specialist at WTW.
“If they’re going to run on or if they’ve got a de-risked investment strategy they may want to remove some of that longevity risk as well.”
Part of the reason why BPA transactions have been so popular is because on balance, corporate CFOs usually see more benefit in removing the risk from the sponsor’s balance sheet than they do in any potential gains from running on their scheme.
Last year, however, the UK government signalled its readiness to permit sponsors to draw down on their scheme surpluses more easily. The proposal has since been encoded in the Pensions Schemes Bill, which is set to be passed into law this year.
This development has given pause to many de-risking plans. With funding levels at near-record highs, the potential to cream off some of those excess funds to invest in the company or hand over to scheme members (or both) has made run-ons a more viable choice.
With the balance seemingly tipped, administrators are more likely to take a chance and hedge the risks that have potential upside – investment exposures and interest rate movements – while using swaps to offload the risk of scheme members living longer.
This is a process that Matthew de Ferrars, Pensions Partner at law firm Pinsent Masons, described as a “DIY buy-in”.
“For larger schemes, if you’re going to run on, then from a corporate point of view, the one thing you don’t like is nasty surprises,” said de Ferrars.
“The financial markets and the way longevity assumptions might go might result in that, so it makes sense to hedge the obvious risks – longevity along with interest rate and inflation risks.”
Longevity swaps may also be a cost-effective strategy because they are usually contracted with reinsurers who can hedge the risk more cheaply than a pension scheme because they can outsource it to the global reinsurance market.
The WTW report noted that swaps were likely to be contracted by medium-to-large schemes with assets of more than £100m.
Aggregate swaps announced last year were just short of £20bn and came from six deals, all involving large schemes. While the legal and governance costs associated with longevity swaps are expected to be a deterrent to smaller schemes, the report’s authors expect more activity to come from the mid-market.
“Whereas perhaps historically it’s only been large deals, we are now seeing interest almost across the board from pension schemes of a range of sizes except the smaller sub-£100million schemes,” said Wiberg.
That increasing interest, according to the report, is steeped in pricing, which has been “better than ever in 2025”, relative to scheme best estimate mortality assumptions, driven by reinsurer fees being less than half the level they were five years ago.
But longevity swaps won’t be right for all schemes.
“If you’re looking at a scheme that is going to be able to do a full buy-in and then buy-out in the next five years or whatever, you wouldn’t go into a longevity swap with all the complication and the work and the advisory fees to then exit it, convert it into a buy-in in a short-term scale like that,” said de Ferrars.
“It’s a clunky sort of process to go through compared with actually just biding your time and just getting rid of the scheme in one shot to buy-in and then buy-out.”
And there is another potential headwind to growth.
“Recent lighter mortality experience in the UK has increased the uncertainty relating to future mortality rates – if this trend continues, reinsurers would likely increase life expectancy assumptions which would increase the cost of hedging,” the report stated.
Still, the appeal of running on a scheme to extract surpluses can’t be underestimated, and while the outlook for future mortality and reinsurer pricing may be fuzzy, there is something of a virtuous circle of increased demand and supply in the longevity swap space that could support increased activity going forward.
“Whilst the majority of longevity swaps have covered longevity risk for pensioners in payment, recent years have seen increased reinsurer appetite for non-pensioners, which has resulted in more competition and significant reductions in cost for non-pensioners,” the report states.
“With more schemes considering their endgame strategy and the implementation of longevity swaps at the smaller end of the market becoming more efficient, longevity swaps are a hot topic of conversation for many pension schemes,” it stated.