Need for capital market for longevity risk – Swiss Re

The amount of longevity exposure in pension funds globally is much more than the capacity of the insurance industry to write it, and a capital market for longevity risk therefore has to be created, Swiss Re said in a response to the recent IMF report.

The IMF calculated that age-related spending would double by 2050 due to longevity and Swiss Re said that this is in line with what they had expected. The reinsurer’s head of longevity solutions Costas Yiasoumi pointed out that the UK has been the global leader in terms of the market for longevity solutions.

“If we concentrate on pension plans, the two main types of solutions for transferring the risk are bulk annuities or longevity swaps. We’ve seen a number of transactions undertaken in the UK over a number of years by pension plans in those areas.” As an example he mentioned the Royal County of Berkshire Pension Fund in 2009, the British Airways’ Airways Pension Scheme in 2010 and the Pilkington Superannuation Scheme in 2011.

However, the amount of longevity exposures in pension funds around the world is much more than the capacity of the insurance companies to write it. Yiasoumi said that this is not yet a problem, as the number of pension funds asking for longevity swaps is relatively small, but over time that capacity that reinsurance companies have will get used up.

“What is recognised as more and more pension plans realise they shouldn’t really be holding this risk and want to insure against it, is that that capacity will be started to be used up and we need to find new capacity from somewhere else. That’s where the capital markets come in and there’s work being undertaken by various organisations to try and generate demand for investing in longevity from new investors.”

Swiss Re issued the world’s first tradeable longevity bond in 2010 and other organisations are doing similar things to get investors familiar with this as a risk and to build an investor base. However, this will take a long time and for now the capacity for longevity is with reinsurance companies, Yiasoumi said.

“It’s an important aspect, because you could find that if lots of pension plans start hedging longevity, whether it’s after five, ten or fifteen years, that capacity that reinsurance companies have will start coming under stress. That’s why it’s important that even though there’s still reinsurance capacity at the moment, we still do the work so that in the medium to long term we can find additional capital to provide the protection that pension plans need.”

    Share Story:

Recent Stories

Podcast: The benefits of private equity in pension fund portfolios
The outbreak of the Covid-19 pandemic, in which stock markets have seen increased volatility, combined with global low interest rates has led to alternative asset classes rising in popularity. Private equity is one of the top runners in this category, and for good reason.

In this podcast, Munich Private Equity Partners Managing Director, Christopher Bär, chats to European Pensions Editor, Natalie Tuck, about the benefits private equity investments can bring to pension fund portfolios and the best approach to take.

Podcast - The power of three: Using Common Contractual Funds to improve tax outcomes for investors
Large asset owners are still investing in equities in a way where they are taxed on their income. The implication is that they get a poorer return. They need to, and can, improve this, but how?

In this podcast, AMX Head of Client and Manager Development, Aaron Overy, and AMX Product Tax Specialist, Kevin Duggan, discuss with European Pensions Editor, Natalie Tuck, about three options to help ensure good withholding tax outcomes for institutional investors.
Mitigating risk
BNP Paribas Asset Management’s head of pension solutions, Julien Halfon, discusses equity hedging with Laura Blows

Europe’s pensions challenges
Francesca Fabrizi meets Matti Leppälä, Secretary General and CEO of PensionsEurope, to discuss the key aims and objectives of the association today.