Pension Schemes Face Difficulties Managing Longevity Risk

MetLife Assurance's survey showed pension fund trustees and sponsors are struggling to effectively manage longevity risk, which ranked second only to the measurement of technical provisions and liabilities in importance for respondents.

(July 27, 2010) — According to MetLife’s Assurance report sponsors and trustees are struggling to develop strategies for managing longevity risk, which they ranked as a second-most important risk factor.

“While it’s apparent that scheme sponsors and trustees show a good understanding of the impact that longevity risk poses to their schemes and their organisations as a whole, they seem unable to manage this important risk on their own,” said MetLife Assurance chief executive Dan DeKeizer in the company’s UK Pension Risk Behaviour Index.

DeKeizer said that part of the reason scheme sponsors and trustees have faced obstacles managing longevity risk on their own has been due to a lack of understanding regarding available options.

MetLife’s UK pension risk behavior index analyzed how 89 trustees and sponsored viewed 18 investment, liability and business risks that impacted their pensions. The research studied how well those schemes felt they were handling their risks. A majority of respondents acknowledged that “despite an estimated £1 trillion of assets being exposed,” they had failed to manage longevity risk successfully.

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The firm’s UK Pension Risk Behaviour Index also revealed efforts by schemes to develop and implement risk management are hindered as a result of divergent approaches to risk between pension trustees and scheme sponsors. Specifically, the study revealed a warning that while trustees and scheme sponsors focus on separate, yet potentially equally important, risks, this “divide and conquer” approach may pose risks to pension schemes, thwarting efforts to develop and implement holistic risk management solutions, MetLife Assurance Limited CEO Dan DeKeizer told ai5000.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

From ai5000 Magazine: Playing the Right Game

The active versus passive investment debate has raged within academic circles for decades without resolution. Unfortunately for the world’s asset owners, this has left them wondering what game—Chase alpha? Ride beta?—they should be playing.

There’s a possibly apocryphal story that floats around pension fund circles. A manager for one of the largest corporate funds walks into an office suite to give his quarterly presentation to the executive policy committee. Alan Greenspan has recently made his famous “irrational exuberance” comment, and the company brass is discussing the fund’s mix of stocks and bonds. One of the execs is of the opinion that stocks have risen dramatically in the past few years and are due for a correction, and that the pension fund should reduce its equity weight substantially.

“Well, what do you think,” a more skeptical committee member asks the pension fund manager, who has been avoiding the conversation until now.

“This is what you’re doing if you take the equity weight down,” the fund manager replies, and, like a comic prop, produces a pair of dice and tumbles them across the conference table, where they come to rest in front of the exec who wants to cut back on stocks. The bearish exec frowns, there’s a moment of nervousness, and then the skeptic bursts out laughing, relieving the tension. The company decides not to cut its equity weight.

To read the rest of the magazine article, click here.

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