UK Pension Plans Express Increasing Concern Over Longevity

A growing number of UK pension plans have expressed concern over the increasing longevity of plan members, according to MetLife’s Pension Risk Behaviour Index Study.

(July 18, 2011) – Thirty-eight percent of UK pension plans expressed concern over longer life expectancy of pension plan members in MetLife’s 2011 Pension Risk Behaviour Index Study, up from 28% in 2010.

The study was conducted through interviews with 89 trustees and sponsors of UK defined benefit (DB) pension funds. The study focused on 18 distinct investment, liability, and business risks and sought to better understand how UK DB schemes viewed the importance of such issues in a changing economic landscape.

The report states that “Whilst improvements in life expectancy are good for individuals, Longevity Risk is a key driver of the pressure that DB schemes face and its financial impact on DB schemes should not be underestimated.”

In spite of the fact that pensioners may not begin to outlive their life expectancy in the immediate future, “From a valuation and accounting standpoint there will be an immediate increase in the value of the scheme’s liabilities. Where the sponsor absorbs the Longevity Risk, this may require higher levels of contribution to the scheme,” the report concludes.

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Although longevity was not the most commonly cited risk, survey respondents said that longevity risk was the least-effectively managed risk facing pension funds because it is very difficult to hedge against. In spite of this difficulty, pension funds have been exploring new ways to deal with increasing longevity, going as far as to take out life insurance policies on their members, according to the Financial Post.

While many in the industry have been enthusiastically pursuing such risk-hedging options, Julie Dickson, Superintendent of Financial Institutions in Canada, believes that the development of “longevity products” may increase systemic global risk, the Financial Post reported. In her address to insurance executives in Toronto, Dickson referred the audience to a report entitled “Death Derivatives Emerge from Longevity Risks,” a reference to the complex, risky instruments that have emerged in attempts to combat increased longevity.

It is not by chance that increased concern over longevity coincides with an increase in UK public pension liabilities. Last week, aiCIO reported that total liability for public sector pension funds in the UK has risen by 30% in the last two years. According to Treasury officials, increased life expectancy is one of the main drivers behind the increase in liabilities.

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

APG Head: Regulations Are Preventing Domestic Management of Dutch Pension Assets

The chairman of Dutch pension fund manager Algemene Pensioen Group wants to lessen regulations that have prevented the firm from reclaiming Dutch pension assets whose management has fallen into foreign hands, the Financial Times has reported.

(July 18, 2011)—The chairman of Dutch pension fund manager giant Algemene Pensioen Group (APG) thinks that the Netherlands’ famously stringent regulations are preventing domestic asset managers from managing the country’s pension assets, the Financial Times has reported.

“Dutch pension funds are still heavily reliant on foreign parties for the management of their assets,” Dick Sluimers, the APG chief, told the FT. “As a result two-thirds of the €800 billion ($1.1 billion) of assets under management are now being managed abroad. It is our aim to get part of these assets back to the Netherlands.”

“Because of the strong local regulations Dutch pension providers have to adhere to, their position is weaker than their peers from London and New York.” The result, he said, is “a situation where Dutch parties are meticulously screened while foreign peers co-operate in the same market without these heavy chains.”

Sluimers also fears the impact of impending European Union regulations called Solvency II rules governing capital levels for the insurance sector that may spillover into pension funds.

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“The application of Solvency II would have detrimental consequences for the Dutch pension sector and for countries with comparable systems,” he said. “It would radically change the European investment policies of pension schemes if they are to behave like insurers, and result in a [reduction] of about 5% of total assets invested in shares. We are talking three quarters of a trillion Euros that would evaporate from the European stock markets. I don’t think Brussels realizes the backwash.”

Sluimers’ comments illustrate how regulations originating in response to the 2008 financial crisis have sometimes proven to be a double-edged sword. In June, Kevin McNulty, the CEO of the International Securities Lending Association (ISLA), blasted regulators at the European Union for turning short-sellers into a scapegoat and also claimed that hedge funds had begun to shun short-selling in response.

“Hedge funds like to have a level of certainty on their ability to execute and live with a trade for some time,” McNulty said. “Short-selling is good for markets while artificially stopping short-selling is a bad thing.”

Concern over new regulations is widespread throughout the world, particularly in Europe. A survey in June by Pension Fund Barometer found that heightened regulation was the second greatest worry among UK pension fund managers, right after the threat of inflation.

To contact the aiCIO editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a>