Longevity risk remains major concern for pension scheme sponsors and trustees

by Artemis on May 31, 2011

For pension scheme sponsors and trustees longevity risk, the risk associated with pensioners living longer resulting in pension schemes paying them for longer than expected, remains a major concern and one that has increased in importance to them in the past year, according to a study by MetLife Assurance.

The study which has been published today, MetLife Assurance’s 2011 UK Pension Risk Behaviour IndexSM (UK PRBI), looks at the responses of 89 pension scheme sponsors and trustees and analysed how each group viewed 18 investment, liability and business risks that affect them, and asked how well they felt they were managing those risks.

Longevity risks was ranked as the fifth most important risk factor facing pension schemes this year. Last year longevity risk ranked number two but the study applies a criteria related to average selection rate which has risen from 28% in 2010 to 38% in 2011. The number one risk this year was funding deficits which it is highly likely encompasses some respondents concerns about longevity risk as well.

Whether it is as important to the sponsors and trustees as last year is hard to tell, it feels like it is equally as important if not more so as longevity risk directly leads to funding deficits if not managed correctly. However the respondents have again ranked longevity risk as the least successfully managed risk facing pension schemes of all.

The study says: ‘While some tools exist in the market for hedging or transferring Longevity Risk, they are in their infancy and take-up rate among schemes is still quite small. This risk is likely to remain high on the list of concerns of trustees and sponsors, as their success at managing this risk may take some time to develop.’

It also adds commentary on the change in rankings: ‘Whilst Longevity Risk decreased in importance in the rankings from 2010 to 2011 – from the second most important risk factor in 2010 to the fifth most important risk factor in 2011 – its Importance Selection Rate actually increased 10 percentage points from 28% to 38%, indicating that sponsors and trustees are still very concerned about Longevity Risk, and the impact that increased longevity can have on scheme liabilities. Trustees and sponsors believe it is important in equal measures, both groups selecting it 38% of the time it was presented to them.’

So it appears that despite the developments in the market pension schemes are still openly struggling to get to grips with the risk management options available to them to address longevity related risks as we wrote last year when the 2010 study was published. The fact that longevity risk is still thought of as the least successfully managed demonstrates the opportunity that exists in this market. As we are all aware, the potential market for successfully enabling pension schemes to offload their longevity risk is huge, and whoever can make that process more accessible and easier to initiate could profit significantly.

You can read the press release from MetLife here and download the study here (both in PDF format).

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