Advances in biomedical sciences have dramatically increased lifespans, which poses a real risk to a lot of schemes, with many now looking at the best ways to reduce such a risk.
Aubrey de Grey, a biomedical gerontologist (gerontology is the study of ageing) and founder of the Sens Research Foundation, has said that the first person to live to 150 years old has already been born and that someone born within the next 20 years could live to be 1,000.
For anyone that runs a pension scheme this could be a frightening thought.
News earlier this month that telecoms giant BT hedged 25 per cent of its total exposure to improvements in longevity was the catalyst for a flurry of longevity-related announcements.
Aubrey de Grey, a biomedical gerontologist (gerontology is the study of ageing) and founder of the Sens Research Foundation, has said that the first person to live to 150 years old has already been born and that someone born within the next 20 years could live to be 1,000.
For anyone that runs a pension scheme this could be a frightening thought.
News earlier this month that telecoms giant BT hedged 25 per cent of its total exposure to improvements in longevity was the catalyst for a flurry of longevity-related announcements.
The £16bn BT Pension Scheme set up a wholly owned insurance company and entered into an insurance agreement with The Prudential Insurance Company of America.
In a statement, Ian Aley, a senior consultant at Towers Watson who advised the BT scheme, said: “This transaction was the result of a thorough review of the scheme’s risk exposures and the options for reducing these, followed by a competitive selection process.
“Until recently, it would not have been possible to hedge anything like this much longevity risk in one go. This transaction is three times bigger than anything a UK pension scheme has put in place before, and that record was only set this year.”
So why now?
Someone I was speaking to last week said that interest from non-UK insurers was opening the door for larger deals, as they try to diversify the risk they are taking on.
Indeed, in a recent blog, Redington’s Dan Milkulskis wrote that “anecdotally there are more firms willing to supply longevity hedging cover into the market, meaning that it has become more feasible for large (£5bn+) schemes to contemplate a transaction”.
He goes on to say: "With funding levels generally at their highest levels for three years it is likely that corporate sponsors may be more supportive than they would have been previously of hedging risk in the scheme, including longevity risk. Having said that, most of these deals will have likely taken years to bring to fruition, and so would have been started when funding levels were a lot lower."
The cost and complexity associated with hedging longevity risk has meant it has historically been the preserve of large schemes.
However, this week Mercer and insurer Zurich announced launched a longevity hedge for smaller and mid-sized pension schemes.
“Demand for [defined benefit] derisking solutions is increasing,” said Alan Baker, Mercer’s UK head of DB risk, in a statement. “Combining longevity hedging with our successful fiduciary management service, this is an innovative, practical step opening up a cost-effective DB derisking approach to schemes of all sizes. It’s a lower-risk, higher-return solution compared to alternatives like a pensioner buy-in.”
It certainly seems like things are heating up in the longevity hedging market.
However, in a recent Informed Comment, Alex Zhavoronkov PhD, a director and trustee of the Biogerontology Research Foundation, argued this: "In order to maintain solvency and hedge against the risk of extreme longevity, pension funds must take a more active role in directing research funds and healthcare system reforms, investing in mid to long-term biomedical research funds that will appreciate with increasing longevity."
Perhaps rather than hedging the risk of a 1000-year-old member, schemes should be investing in companies and technologies that can make this a reality.
