Posted on 08 Jun 2012
Aon Hewitt, the global human resource solutions business of Aon plc, has said that countries with major defined benefit (DB) pension scheme markets are beginning to wake up to the challenge of rising life expectancy. These markets, while behind the UK’s pension industry, which has started to confront this challenge in recent years, are beginning to look at new approaches to risk settlement such as longevity swaps, buyout and buy-in.
Matt Wilmington, principal consultant in the International Retirement and Investment team at Aon Hewitt, said:
“The risk settlement market has blossomed in the UK because trustees, sponsors and providers have had a better shared understanding of the issues around estimating longevity. That has helped the decision-making process, as the amount and purpose of the premium paid to the provider – usually banks and insurers – has been well understood.
“Elsewhere, whether in Europe or further afield, the challenge has been for countries, first to recognise that there is an issue and then to establish a credible ‘best estimate’ view. That has not been helped in some cases by a slowness in responding to trends in funding and accounting valuations.”
Conditions vary from country to country in both Europe and the rest of the world, but longevity risk is an issue to be managed if some or all of these factors are present in individual markets:
- a mature DB pension market
- a requirement to pay pension (rather than lump sum) benefits
- pension indexation
- a requirement to fund plans to a reasonable level over a reasonable timeframe
When these factors are present, it is likely that banks and insurers with possible solutions to longevityissues will become increasingly active, which, in turn, will help develop the market.
Matt Wilmington continued: “We are using the experience gained in the UK to work with our colleagues and clients around the world to take the latest postcode and experience modeling into their markets and to apply them to the longevity issues particular to their countries. As pension schemes and companies increasingly recognise the issues caused by changing life expectancy, we expect to see providers improving their offerings and for these markets to grow substantially in a short space of time.”
Country to country
Aon Hewitt has found that each country’s longevity issues are very much specific to their own schemes and populations. However, at present, the focus for risk settlement transactions is likely to be centred on the Netherlands, Switzerland, Germany, Ireland and Canada, while Japan, the US and Australia have also started to show some interest.
The industry in the Netherlands is currently awaiting the outcome of the new pensions agreement, as uncertainty still reigns about whether sponsors and/or pension boards will be able to cut back accrued benefits or benefits in payment to reflect increases in life expectancy. How that turns out will be critical to whether or not this $600bn market opens up to risk settlement. If benefits can be reduced then an automatic safety valve is available and hedging longevity makes little sense. However, if they cannot, sponsors will be keen to find other solutions to eliminate that risk from their books.
Switzerland, Germany and Ireland
In Switzerland, Germany and Ireland an appetite to derisk clearly exists, however historic assumptions about life expectancy are only now being reviewed and updated. As these updates continue to happen over time, and a more credible view of life expectancy emerges, we anticipate a charge towards the risk settlement market.
In Canada where closed/frozen DB plans are still almost in the minority there has been a realisation that in order to continue to provide some of the richest DB benefits in the world the benefits already accrued will have to be derisked. Large Canadian funds are currently exploring the full risk settlement market, assessing the value for money of longevityswaps and annuities in much the same way as is currently done in the UK.