Aon Hewitt sees appetite for longevity risk transfer going global

The UK’s pension industry is leading the way in approaching longevity risk transfer and pension plan de-risking with the use of instruments such as longevity swaps, but the rest of the world is starting to take more notice as the risk of pensioners living longer than expected becomes a priority for defined benefit pension markets worldwide. Aon Hewitt, the human resource focused arm of insurance and reinsurance broking group Aon, says that countries are beginning to wake up to the challenge set by rising life expectancy.

Europe seems the most likely region for longevity risk transfer to next become more prevalent as their pension markets are more similar to the UK. Matt Wilmington, principal consultant in the International Retirement and Investment team at Aon Hewitt, said; “The risk settlement market has blossomed in the UK because trustees, sponsors and providers have had a better shared understanding of the issues around estimating longevity. That has helped the decision-making process, as the amount and purpose of the premium paid to the provider – usually banks and insurers – has been well understood. Elsewhere, whether in Europe or further afield, the challenge has been for countries, first to recognise that there is an issue and then to establish a credible ‘best estimate’ view. That has not been helped in some cases by a slowness in responding to trends in funding and accounting valuations.”

Aon Hewitt says that while conditions differ from country to country there are a number of factors in a pension market which will result in longevity risk becoming an issue to be managed. These include whether it is a mature defined benefit market, whether there is a requirement to pay pension (rather than lump sum) benefits, pension indexation and whether there is a requirement to fund plans to a reasonable level over a reasonable timeframe. If some or all of these factors are present in a pension market then it is likely that banks and re/insurers will become increasingly active in promoting longevity risk transfer solutions and that will help a market to develop.

Matt Wilmington added; “We are using the experience gained in the UK to work with our colleagues and clients around the world to take the latest postcode and experience modeling into their markets and to apply them to the longevity issues particular to their countries. As pension schemes and companies increasingly recognise the issues caused by changing life expectancy, we expect to see providers improving their offerings and for these markets to grow substantially in a short space of time.”

Aon Hewitt say they have found that longevity issues can be specific to a country’s pension schemes and population demographic. At present, they say that the next most likely candidates for longevity risk transactions will be found in the Netherlands, Switzerland, Germany, Ireland and Canada, while Japan, the US and Australia have also started to show some interest.

So longevity risk transfer through solutions such as swaps looks set to be a growing area as the rest of the world assess whether these types of instruments are suitable to their pension schemes and populations needs. As the demand grows from abroad it is likely to heighten the interest in efforts to standardise longevity swap contract language and efforts to create longevity indices against which transactions can be based. We know the interest is there in the capital markets to assume longevity risk in much larger amounts than are available today, it remains to be seen whether the ‘liquid market’ many would like to see developed becomes a reality or not.