Continuing increases in life expectancy – confirmed this week by the actuarial profession – have brought growing concern for the financial burden faced by occupational pension schemes and their sponsors.
A range of new insurance and investment-based products have recently come onto the market, to help schemes manage the risks of future increases.
“The longevity risk held within pension funds is enormous,” says Richard Giles, a principal at Mercer. “Medical, economic and social developments over the next 40 years will all affect mortality rates, and their impact on the financial position of pension schemes could be very significant,”
“Until recently, there has been a shortage of investors looking to offer a solution and ‘buy’ longevity risk. This is changing, and the arrival of at least 10 new insurers in the bulk annuity market has so far brought more than 30 billion of capacity. Investment banks and hedge funds are now also developing longevity derivatives,” adds Mr Giles.
The range of products themselves is very different. Some solutions only provide protection for a limited period. Other options are based on an index, rather than being customised to a particular scheme, while others combine investments with longevity protection.