Despite Minimal Execution, Interest in Longevity Swaps Grows

(November 19, 2009) – A new study of large pension schemes in the United Kingdom show that many expect longevity swaps—used to hedge against retirees outliving actuarial predictions—to play a “strong role” in plan funding in the future.

According to Aberdeen Asset Management, 40% of the 51 schemes surveyed expect such derivatives to be a prominent part of plan funding going forward; 60% claimed that such focus would be “moderate.”

Problems of capacity and actual action abound, however. To date, only two funds—Babcock International and RSA insurance schemes—have executed deals to insure against longevity, and although consultant Watson Wyatt predicts that there are upward of $25 billion in longevity deals in the pipeline, current capacity, they predict, is less than this.

“Pension schemes perceive longevity as a big risk and so they want to do something about it, but the general feeling is that they need to see the market develop,” said Aberdeen’s U.K. Business Development Director Natalie WinterFrost, client according to the Financial Times.

The funds surveyed were, on average, funded to a level of 87%.

To read ai5000’s take on the risk of longevity—“The Problems with Whisky and Women”—click here .