The Organisation for Economic Co-operation and Development (OECD) has published a 230 page report looking at various issues affecting the pension markets and highlighting areas that need reforming in order for pension plans to meet their obligations and better serve their members. One of the issues covered in the bumper report is longevity risk and the OECD has boldly called on governments to take the lead and work to stimulate a fully functioning longevity risk market.
Governments are well placed to kick-start longevity risk transfer as they are perfectly placed to work alongside their various statistical agencies to construct longevity indices and standardised, tradable longevity hedging products, say the OECD. These indices and risk transfer products could allow pension funds to hedge and manage the risks of their members living longer.
The OECD calls for default annuitisation at the age of 65 to help insure against longevity risks. All pensioners, particularly those in auto-enrollment schemes, should be forced to annuitise a portion of their pension savings as soon as they reach retirement age to help protect against longevity risk. However, the OECD also believes that for annuitisation to be most effective the world needs a functioning market in longevity risk.
According to the OECD, the report discusses the creation of standardised longevity swap derivatives which could be used for hedging purposes and also traded in a market, using underlying longevity indices for pricing and settlement of the instruments. Eventually the OECD says they would like to see a liquid market in longevity risk which would include over the counter trading. The report also suggests that governments could utilise the indices to issue bonds linked to longevity trends, these could be something like the longevity trend insurance-linked security, Kortis Capital Ltd., that Swiss Re issued in 2010.
Everything that the OECD calls for on longevity risk in this report is inline with where key longevity market participants would like to see it evolve into. Whether the OECD can succeed in engaging governments where others have failed remains to be seen.
The research undertaken by the OECD to produce this report began back in December 2010. The OECD Pensions Outlook 2012 contains many other insights into possible reforms for the pension markets. You can read more about it here.