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Deutsche Börse and Club Vita seek to facilitate index-based longevity swaps


Interesting news in the longevity swap and longevity risk transfer market today as Deutsche Börse and the longevity analytics arm of Hymans Robertson, Club Vita, announce the launch on Friday of the Xpect – Club Vita Indices. This new series of longevity indices aim to offer UK pension schemes an index-based alternative which they say will better reflect the scheme’s risk profiles when they want to enter into longevity swaps.
They say that the new, tailored index offers a viable alternative to the indemnity based approach to longevity swaps that most pensions schemes have followed to date. They also say that this will open up the longevity swap market to smaller pension schemes, something that could help to grow the market significantly if achieved.

The press release, available on the Hymans Robertson website here, explains what they see as the benefits of these new indices:

With existing longevity indices, which display mortality of the average population, schemes that want to pursue an index-based swap must address the basis risk that results from the gap between their specific risk profile and the longevity risk of the population. Due to this basis risk, most schemes that complete a longevity swap do so via the ‘indemnity’ method, which involves constructing the predicted longevity profile of a scheme based on its members.

The Xpect – Club Vita Indices are different in that they offer schemes a range of longevity profiles for pension scheme members based on their sex and income as well as cohort groups. Schemes can therefore choose the index, or combination of indices, that best suit their member profile, in order to form a more accurate picture of expected longevity. The indices draw on Club Vita’s analysis of five million pensioner member records covering men and women from over 140 UK schemes.

So essentially, this will allow a pension scheme to choose to use an index which more closely matches their risk profile and the pensioners who are actually part of their scheme.

Stefan Sachsenweger, Head of Back Office Data & Analytics, Deutsche Börse, said; “There were roughly £14billion in longevity swap deals completed for UK pension schemes in 2011, and about £3 billion in 2010. With more deals expected in 2012, pension funds and insurance companies must seek new ways to manage longevity risk. Longevity swaps is one such option and requires pension plans to have the right tools to accurately assess and offset these liabilities. The new Xpect – Club Vita Indices combine Deutsche Börse’s data expertise with Club Vita’s knowledge of pension scheme and longevity trends to provide these market participants with a targeted, customizable and objective approach to hedging against longevity risk.”

Andrew Gaches, a longevity Consultant from Club Vita, added; “In the current climate, with companies still carrying large pension deficits and the prospect of poor investment returns facing them, de-risking can and should be an attractive option for many schemes.”

“Longevity swaps are one de-risking option that schemes are increasingly pursuing, but up until now these have been the preserve of the largest schemes and have focused on their pensioner members only.”

“The new Xpect – Club Vita Indices allow schemes of all sizes to investigate the viability and cost of longevity swaps for them. Because the index tracks the longevity profile of multiple types of people, pension schemes can build up a much more accurate picture of their longevity profile than if they relied on existing, whole population indices. This is crucial, because higher socio-economic groups have seen 50% bigger rises in life spans than lower groups – a fact which population indices simply do not capture. Many more schemes will now be able to remove longevity risk, where appropriate, in relation to all their members.”

“Looking ahead, longevity swaps are likely to be particularly attractive to pension schemes looking for short-term protection against longevity while they get ready to remove all their risks in the medium term.”

They hope that the Xpect – Club Vita Indices will prove a cheaper way for smaller pension schemes to transact longevity swaps making them a more accessible risk transfer instrument. The indices should also allow longevity swaps to be constructed for deferred members, where as to date they have all involved pensioners.

The Xpect – Club Vita Indices will be published on every third Friday of the month on services such as Bloomberg and Reuters. Deutsche Börse calculates and disseminates index values based on the most recent pension-related mortality data in the UK provided by Club Vita. The new indices use a survivor-based approach where the index levels start at the same point and then deteriorate at different rates, depending on the longevity of the respective group.

More information on the Xpect Indices can be found on their website.

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