Osborne Clarke has advised The Royal County of Berkshire Pension Fund (Royal Berkshire) on an insurance contract that is designed to hedge out its longevity risk to Windsor Life, a subsidiary of Swiss Re.

The transaction covers 11,000 pensions in payment on 31 July 2009, worth around £750 million. It is the first contract of its type entered into by a Local Government Pension Scheme (LGPS) fund and only the third in the UK.

The insurance contract, which over its lifetime relates to approximately £750 million of pensioner liabilities, will significantly reduce Royal Berkshire's exposure to the risk posed by potential increases in longevity rates. This is a key risk for all defined benefit pension schemes. The deal means that the financial risk to Royal Berkshire of members living longer than expected has been transferred to Swiss Re.

The £1.2 billion fund, which has over 45,000 members in total of which approximately 11,000 are pensioners, made the decision to enter into the longevity hedge as part of a greater focus on risk management.

Longevity hedges have been discussed within the pensions industry for a few years and are only now starting to become reality following the first private sector deal by Babcock International earlier in the year.

Mark Womersley, pensions partner at Osborne Clarke and legal expert on LGPS funds, said:

"This is a ground breaking transaction and many other pension funds will be watching keenly to see if they can adopt a similar measure. From a legal viewpoint, this was a complicated contract, made all the more interesting by being the first carried out by a LGPS fund. With 2010 valuations on the horizon, it is a step that other LGPS funds would do well to consider.

"Throughout the transaction our pensions team has worked closely with our financial institutions group, whose in-depth funds and regulatory expertise proved invaluable in achieving a positive result."

Nick Greenwood, Pension Fund Manager for the Royal Borough of Windsor & Maidenhead, said:

"We have been looking at the fund's risk profile for some time and are very pleased to have entered into this insurance contract with Swiss Re. With our lawyers, Osborne Clarke, we believe we have achieved an innovative solution to one of the biggest issues for pension funds today, namely the uncertainties around longevity trends."

The Osborne Clarke team advising Royal Berkshire was led by Mark Womersley, and included Paul Anning and Laila El Baradei from the financial institutions group. Swiss Re was advised by Clifford Chance.

Date: 15 Dec 2009