Longevity risk – the risk that the pension plan has to provide benefits to its members over a longer period than expected – is being recognised as a major threat to pension plans and the companies that sponsor them.
The fundamental underlying risk for any pension plan (and its corporate sponsor) is that the plan should be unable to meet its liabilities. In the past, the main potential causes for such a failure have been considered to be a failure of investment strategy (equity risk) or an unexpected drop in interest rates (interest rate risk). However, increasingly longevity risk – the risk that the pension plan has to provide benefits to its members over a longer period than expected – is being recognised as a major threat to pension plans and the companies that sponsor them.
Conclusion
Although longevity is by no means a liquid asset class, adding a longevity swap to your pension portfolio can certainly provide substantial benefits. Longevity swaps can help pension plans – and their corporate sponsors – to protect themselves from one of the three greatest risks they face.
A pension plan with a typical level of risk aversion should explore the benefits of adding a longevity swap to its portfolio. In fact, underfunded pension plans can substantially improve their funding ratio simply by removing their longevity risk – without compromising the expected funded level.
By approaching longevity swaps as an asset class rather than viewing it as a straightforward insurance, companies and pension fund trustees can judge the true value of longevity swaps and select the appropriate level of protection.
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Please read more in the attached document.
