Key points:
• This comes at a time when the impact of longevity risk has risen by 50%
• With DB schemes maturing and investment risk being dialled down, longevity is now a bigger risk than ever before for schemes
• Longevity management is rightly moving higher up the agenda
• New service makes solutions more accessible to the mainstream DB market
Some [33] UK pension schemes have entered into longevity hedges since the first deal in 2009. The average value of the reserves for pensions in payment in these deals is almost £2bn. Only two deals of less than £500m have been completed.
Commenting, Douglas Anderson, Founder of Club Vita, said: “There are good reasons to anticipate an upswing in longevity management deals. With negative real yields on UK gilts, the impact of longevity risk – i.e. the cost of continuing to pay pensions when people live longer than expected - has risen by 50%. This is in the context of the risk of yields staying low or getting lower increasing following the Brexit vote.
“This comes at a time when schemes are maturing and reducing their exposure to investment risk. Consequently longevity risk now represents a larger slice of the risk pie than ever before. It’s therefore inevitable that longevity risk management will move higher up the agenda for those running DB schemes.
“Yet few trustees of mainstream pension schemes have thus far considered longevity insurance. This is for a number of reasons, including:
• The need to create complex legal agreements;
• The need to manage collateral; and
• The cost of obtaining competitive insurance quotations.”
Club Vita has invested heavily in technology to efficiently deliver detailed statistical analysis to each scheme to support their risk management programmes, such as benchmarking survival patterns against peers.
Douglas Anderson added:
“VitaHedge is a natural extension of Club Vita’s existing data services. Until recently, insurers have only been confident to offer attractive prices to the biggest schemes, but that’s now starting to change. Club Vita is proud to be opening up the benefits of longevity hedging to a wider audience of pension funds.
Phill Beach of Legal & General said: “Legal & General has a proud history of delivering new and innovative pension risk transfer solutions to pension schemes of all shapes and sizes. Longevity insurance has an important role to play in pension de-risking journey plans and has historically been utilised by only the largest pension schemes and insurance companies in the UK. We believe VitaHedge will help smaller and medium sized pension scheme overcome the barriers they have historically faced. We are delighted to work with Club Vita to help improve the accessibility of longevity management solutions at a time when the costs of this risk are increasing for pension schemes.”
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