There’s no question longevity risk has become increasingly top of mind for pension plans. But it looks as if our neighbours across the pond may have a leg-up in hedging against the risk.
Earlier this month, one of the U.K. pension schemes under global company Akzo Nobel signed a £1.4-billion (approximately C$2.2-billion) longevity insurance contract with Swiss Re. The agreement covers close to 17,000 individuals and their future contingent beneficiaries. Swiss Re says it’s a sign that pension funds and insurers are becoming more comfortable with longevity solutions.
“The pension funds of corporate and public sector organizations are gaining a better understanding of the potential risks arising from their longevity exposures,” said Alison Martin, a member of Swiss Re’s group management board and head of life and health.
While the deal may have been with a U.K. plan, George Graziani, Swiss Re’s senior vice-president of client markets, says it’s a sign of things to come in North America. “Increased life expectancy is definitely a global phenomenon,” he said. And it’s a costly phenomenon, too.
“Put longevity exposure in dollar terms and we have some very large numbers,” said Graziani. “For example, globally, there’s about $20 trillion of longevity exposure. In Canada, we’ve got [more than] $1 trillion of exposure, and in the U.S., it’s around $7 trillion. And Canada is overweight, largely because we have a lot of defined benefit pension plans.” That, he says, counts for our large exposure.
As an example of the cost implications of longevity risk, Graziani uses the scenario of a 70-year-old male, expected to die, on average, at age 86. If his expected longevity was to increase to age 87—just by one year—it could have a huge financial impact.
“It turns out that, that change approximately amounts to about a 5% change in the value of his pension,” explained Graziani. “So, in terms of the exposure in Canada, if we had $1 trillion of pension longevity exposure, a 5% change would mean a $50-billion increase in the amount of the liability.”
Swiss Re has signed several contracts with pensions in Europe and the U.K. over the past few years, and Graziani says there is now also a growing level of interest in Swiss Re’s offerings here in Canada and in the U.S.
In 2007, Swiss Re made its benchmark longevity hedge market transaction, with Friends Provident. In 2009, it closed a £1-billion longevity insurance contract for the Royal County of Berkshire Pension Fund. In 2010, the company issued US$50 million of longevity trend risk bonds to the capital markets through the Kortis Capital Ltd. securitization program.
This article originally appeared on Benefitscanada.com