Pall Corporation, a US water purification company, has signed a deal with JP Morgan to protect its UK pension fund against rising life expectancy. Such deals are still uncommon, but Pall’s was particularly unusual.

Most longevity hedges guard against the chance of pensioners living longer. While life expectancy is rising across the population it is slowest among the elderly. Insurers and banks have been quick to offer longevity insurance for older pensioners rather than those still working because it presents less risk. However, for Pall, JP Morgan - with pensions consultancy Mercer and asset manager Schroders - has broken fresh ground by protecting against life expectancy rises predicted for the company's current workers: aged between 25 and 65. But banks and insurers will protect longevity only up to a certain point. If doctors discovered a cure for cancer, leading to an enormous jump in life expectancy, the pension scheme would usually have to bear all of the additional cost. A source close to the Pall deal, said: "There is a cap and a floor. It works both ways, so that JP Morgan gets some level of protection against a severe upwards move in life expectancy, and the scheme gets protection against a severe downward move." JP Morgan would not be liable if cancer was cured; equally, if a flu pandemic killed off half the scheme's pensioners, Pall would not have to pay the bank millions in compensation. The source said: "Caps and floors are very useful tools to secure commercial comfort for both sides." Though banks and insurers do not typically disclose this level of detail about their deals, it is standard practice that most longevity hedges, including secondary deals whereby pension insurers pass longevity risk to reinsurers, would contain such caps and floors. Pall's deal also allows a small scheme - worth £120m - to protect itself. This is because it does not guard against the life expectancy rises that its 1,800 members will experience. Rather, it protects it against a rise in life expectancy in the general population. This may be less precise, but it is cheaper and easier, according to Andy Connell, head of liability-driven investing at Schroders, who oversees the day-to-day management of the contract. He said this meant the hedge could be offered by and dealt between several banks, though JP Morgan is the only one to have done it so far. • Scepticism Longevity hedging still attracts scepticism from the pensions community. Mike Taylor, chief executive of the £4bn London Pensions Fund Authority, said although rising life expectancy had become a serious issue for the scheme, selling this risk was not economic. He said: "The average age for death is going up by two and a half years in every 10 years, but according to actuarial assumptions for LPFA, our members' average age for death is up three years for every 10 years - and that is frightening. For 10% of our liabilities, 1% of them can be specifically identified, such as high earners who are better off and are expected to live longer. We have spoken to banks and insurance firms specifically about hedging the longevity risk of this cohort of 800 employees." However, Taylor said the scheme concluded that the solution they offered was no better than the structured solution the scheme already had in place. "We currently hedge our interest and inflation risk through a liability-driven investment strategy and we are not convinced banks or insurance companies set up specifically for longevity risk can offer anything more," he said. Taylor's scheme used longevity databases to forecast how long its members are likely to live. It is one of 100 pension funds signed up to Club Vita, a database run by consultancy Hymans Robertson. Andrew Gaches, longevity consultant at Club Vita, said: "Schemes are trying to understand longevity better. But very few transactions are taking place, because of the high costs associated with selling such risk. "Schemes need to question whether the price is right, look out for any constraints in a contract, and consider whether the counterparty is strong enough to withstand any extreme situation." The JP Morgan deal with Pall offers the prospect of longevity hedging for smaller schemes, but it is early days. David Collinson, head of new business at insurer Pension Corporation, said that smaller schemes might be better off with a full insurance buyout or buy-in. He said longevity hedges required administrative effort, and would only be worthwhile for schemes valued at more than £500m.