Longevity hedging for all


An Aon Hewitt executive told Professional Pensions that even small pension schemes should consider hedging their longevity risks or entering into longevity risk transfer transactions. To date, longevity risk transfer transactions have been large affairs with schemes worth billions involved, but the Aon Hewitt representative suggests that could change.

As the longevity risk transfer market matures and more companies step forward who are willing to take on longevity risks from pension schemes the inevitable will happen and deals will become more accessible for smaller schemes. Buy-outs are an obvious option that would allow a small pension scheme to offload their longevity risks but other methods such as longevity swaps could also become more accessible.

What will really help to open the market up and turn longevity risk transfer into a commoditised product accessible to even the smallest pension schemes are standards and indices. The Life & Longevity Markets Association are working on standardisation of certain mechanisms that can be used to hedge longevity risks and this will put the foundations in place to allow the market to grow and welcome smaller schemes on board. The other development that will help is for there to be more public deals which see the reinsurers who are assuming longevity risks through buy-outs offloading their risks to the capital markets.

Until we see easy to access, standardised methods for pension schemes to hedge longevity risks and a pipeline of longevity risks being passed on to the capital markets it is hard to see how the market can grow significantly as there is only so much longevity that can be assumed by the ultimate reinsurers.

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