- Tailored index offers a viable alternative to the ‘indemnity’ approach to swaps used by most UK pension schemes and opens the market up for smaller schemes
- Innovative indices will track the different life expectancies of various types of pension scheme members
- New indices will give schemes the advantages of an index-based trade, while also allowing them to customize the transaction to their member profiles
- Roughly £14bn of longevity swap deals were completed for UK pension schemes in 2011, and £3bn in 2010. A number of additional transactions are in the pipeline for 2012
Deutsche Börse and Hymans Robertson’s longevity analytics arm, Club Vita will launch on Friday the Xpect - Club Vita Indices, a new series of longevity indices that offer UK pension schemes an index-based alternative to better reflect the scheme’s risk profile when pursuing longevity swaps.
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.
Stefan Sachsenweger, Head of Back Office Data & Analytics, Deutsche Börse, comments:
“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, Longevity Consultant, Club Vita, adds:
“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.”
The Xpect - Club Vita Indices will open up longevity swaps to a far larger number of schemes, in part because it may prove cheaper to pursue a swap via this method. The scope of the new indices will also allow schemes to explore a longevity swap for deferred members as well as pensioners, where the swap market has been concentrated to date.
The Xpect - Club Vita Indices will be published on Reuters and Bloomberg every third Friday of the month. 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.
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