In a recent white paper titled ‘Longevity and Pensions – protecting company pensions against longevity’ AEGON argue that companies need to actively investigate the level of longevity risk their pension scheme faces and proactively de-risk themselves. They say that despite longevity being seen as a relatively new risk to pension schemes there are now a number of solutions available.
The paper suggests that the market for longevity risk transfer and hedging is now sufficiently mature that all companies should be able to address the longevity risks they face. Companies need to analyse and quantify the longevity risks that they face and adjust their expected pension liabilities accordingly. They can then look to different longevity risk transfer and hedging techniques to provide a cushion which protects them against rising pension liabilities caused by aging. They cite indemnity hedges as a good way to hedge longevity as they say index hedges don’t offer complete protection and can also introduce basis risk.
Martijn Tans, Director at AEGON Global Pensions, states ‘As people have come to enjoy longer lives, our pension systems have not been adjusted accordingly. Retirement ages and funding assumptions for pensions do not yet generally reflect the impact of longer-lived populations. As a result, state-run social plans, company-sponsored plans and private retirement savings are facing unprecedented challenges.’
Chris Madsen, Head of Risk Structuring and Transfer at AEGON states: ‘With longevity continuing to improve, it is important that pension plans and their company sponsors take another look at longevity risk – starting by looking at the risk around the best estimates of their future pension liabilities. Once companies have a good idea of how much risk their pension plan faces, they can take advantage of the indemnity hedges that are available in the market to mitigate the risk. It is now possible to protect a pension plan against longevity risk.’
The paper is essentially an advert for AEGON’s services but contains some really good insight and ideas on how pension plan longevity risk can be managed. You can request a copy of the full paper here.