Aon Hewitt tells pensions to delay longevity swaps

Due to a dislocation in current pricing for longevity swaps, caused by lower rates of improvement in mortality in the UK, retirement and health advisory Aon Hewitt, a division of the global insurance and reinsurance broker, has warned pension schemes to delay any longevity transactions for the moment.

Aon Hewitt said today that pensions should consider delaying longevity swap transactions until the market corrects itself and pricing returns to more normal levels.

The firm explains that after ten years where longevity improvement has been smooth and at relatively high rates, this has become embedded in longevity reinsurance firm’s pricing models. However, Aon Hewitt notes that since 2011 mortality rate data suggests that there has been a “sea change” in the underlying trend, with improvements much lower than anticipated.

Tim Gordon, partner & head of Longevity in Aon Hewitt’s Risk Settlement Group, commented; “Mortality improvements in the UK have been much lower than expected over the past five years, averaging just 1% per year for males, compared with 3% per year in the first decade of this century. This is the most extreme reversal in mortality improvement trends seen in the past 40 years. What was initially assumed by many actuaries to be a blip is increasingly looking more like an earlier-than-expected fall-off in mortality improvements.

“The industry is currently trying to digest all the implications of this emerging information and – inevitably – it is taking time to feed through into insurance and reinsurance pricing.”

Martin Bird, senior partner & head of Risk Settlement at Aon Hewitt, added; “While there remains a strong appetite across the industry to manage pension risk, with a particular focus on tackling the uncertainty relating to life expectancy, there is now a potential price dislocation in the market. If insurers and reinsurers are pricing using out-of-date mortality assumptions, schemes could be in danger of transacting on poor terms. Unlike a bulk annuity, a longevity swap is all about longevity – a consensus view on best estimate life expectancy is a critical component of a functioning and competitive market.

“If schemes are not confident that pricing is up-to-date and that the deal makes financial sense, they should consider delaying until the market corrects. The situation is not unlike where petrol station forecourt prices take time to adjust when the price of oil falls. But – unlike motorists having to refuel their cars – pension schemes can choose when to buy longevity insurance.”

The changes in mortality rate data have been blamed for the longevity swap and reinsurance market being slower in 2016 than previous years and this warning from Aon Hewitt looks set to slow this down even further.

It seems that some reinsurance markets have not yet fully factored the new data into their pricing, while others have, resulting in discrepancies in pricing.

Once the changes in mortality improvement have been fully digested and factored into pricing across all reinsurance markets though, the transaction volumes will likely pick up once again.

However this hasn’t stopped the longevity swap market entirely and a number of deals have been recorded so far in 2016.

View details of many historical longevity swap and reinsurance transactions in our Longevity Risk Deal Directory.