More longevity swap transactions are expected to take place this year as the larger schemes get ready to de-risk, according to a report.
Contributors to the report, Pensions Buyouts and Longevity Hedging, said that increasing longevity expectations is one driver for trends in the de-risking space.
Other factors include market volatility and quantitative easing (QE), which have been a factor in growing liabilities and the increase in pension scheme deficits.
Many schemes have been preparing their data throughout 2012 in order to de-risk, and will be following BAE's £3.2bn longevity swap, which was completed in February, though not necessarily on that same scale.
Research firm Clear Path Analysis' report is based on contributions from Grant Thornton, Deutsche Boerse, Travers Smith, and also features insights from the pensions teams at Heineken and Trinity Mirror Group.
It is becoming difficult for actuaries and demographers to predict the trajectory of longevity improvements, said Dr Aubrey de Grey, chief scientific officer at SENS Research Foundation.
Even so, Dr de Grey said: "It is widely believed that mortality rates will continue to decline and longevity to increase at rates that work out at a rise of about 2.5 years per decade in life expectancy at birth."
Faced with this prospect, schemes are looking to de-risk, but it is not necessarily an easy option to take.
Smaller pension schemes in particular are "daunted" by the de-risking options they face, because of growing regulatory pressures - such as Solvency II - and the complexity that surrounds inflation rates and longevity, contributors said in the report.
Funding shortfalls have also made it more difficult for the smaller pension schemes and providers have to be particularly alert to new analysis of data on longevity, especially for buy-ins and buy-outs.
However, Kelvin Wilson, pension risk solutions director at Grant Thornton said: "Buy-outs tend to work for schemes at the smaller end of the scale, where the price differential isn't as significant, at 30-40 %, the financial impact for the smaller schemes is less."
There is a general consensus that trustees of larger multinational schemes are better educated in the longevity market place, but for the smaller firms it often comes down to an issue of priority.
Eva-Maria Keller, product manager longevity at Deutsche Boerse, said: "Prioritisation issues are similar for bigger and smaller schemes but the complexity is more difficult to handle for smaller schemes. However, the different solutions that currently exist to hedge longevity risk seem to be transparent for market participants, especially smaller schemes. They simply don't know how easy it can be."
In terms of providing advice, Keller said: "Data is a key issue. If you consider hedging your longevity risk, it is very important to understand your portfolio and to have a clear view of the specific life expectancy of your pensioners compared to the population. This will enable you to judge the advantages of a standardised longevity hedge."
Wilson agreed and stressed the importance of planning within realistic timeframes. He said: "A lot of my clients are putting in triggers or flight paths which effectively mean they monitor their positions against a set criterion to determine when they are going to engage in a transaction. It then becomes a planning and monitoring exercise to take advantage of market opportunities.
"Flight paths should be used to manage risks and improve the funding position of schemes within agreed boundaries. You have to take risk out when funding improves and consider re-risking within controlled boundaries when funding deteriorates."
Peter Hughes, partner at Travers Smith, said: "When entering into any derivative or insurance contract, a trustee can be forgiven for feeling that it is trying to read the future in a crystal ball.
"In structuring the transaction trustees will need commercial advice on the actuarial model underlying the contract. This is the heart of the transaction. The trustee needs a clear understanding of different sensitivities implicit in the model and the payments required under the contract in different future longevity scenarios."
First published 15.03.2013
monique_simpson@wilmington.co.uk
