With over $17trn of pension assets exposed to longevity risk across Europe, UK and the US, governments and key stakeholders have been called upon to take action to help tackle risks.

A report by insurance giant Swiss Re – which warns that underestimating life expectancy by just one year can increase a pension plan’s liabilities by up to 5% - has argued that the insurance industry, governments and various key stakeholders need to play a bigger role in helping deal with longevity risk and can no longer afford to sit back on the issue.

Key recommendations in the report include that employers and trustees assess the extent of their longevity funding issue, whether they are reserving at an appropriate level and look at the advantages and feasibility of transferring some or all of their risk; while re/insurers must continue working together to provide innovative solutions for tackling longevity risks.

The report also highlights the importance of developing a capital market solution that can deal with the future, longer-term magnitude of the liabilities. The industry, said the report, should encourage governments, and other bodies to help create such a market.

Costas Yiasoumi, head of pensions solutions at Swiss Re, said: “The more traditional ways for insurers, and some banks, to help pension funds are the well known buy-in and buy-out solutions.

“More recently insurers have developed indemnity longevity risk transfer solutions, which transfer only the longevity risk liabilities from a pension plan to the insurer. This is an appropriate approach for pension plan managers who want to keep control of their investments and assets.”

Yiasoumi added that governments can help by creating the right infrastructure that makes private solutions to tackling longevity risk accessible and affordable. “Key to this is to ensure consistency of regulation and accountancy guidelines in order to encourage sound risk management practices,” he said.

The report also stated that while the most developed longevity insurance market is the UK, activity is expected to develop in a number of other European countries, including the Netherlands and Switzerland.

“Unlike the UK market, which started with bulk annuities before longevity insurance became an accepted alternative, we see a greater balance in Europe and we may find that the first large European pension transaction is a longevity insurance contract rather than a bulk annuity contract,” Yiasoumi added.

The report, A short guide to longer lives: Longevity funding issues and potential solutions, is available for download at www.swissre.com/longevity

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