With Pensioners Refusing to Die, Trustees Move To Insure Against Longevity

A new study is showing that UK pension plans, faced with an aging population that relies heavily on defined benefit pension schemes, are expected to increasingly insure against such longevity risk.

(October 8, 2009) – United Kingdom (UK) pension schemes are expected to insure against the risk of retirees living longer then expected at an unprecedented level, a new survey reports.

According to Hewitt Associates, UK plans will insure more than US$8 billion of liabilities stemming from retirees living longer than expected. The insurance, sometimes referred to as longevity swaps, are structured so that insurers, banks, or another counterparty are paid a premium to take on the risk of a pensioner living past a set age. The longer a pensioner lives, the larger a pension plan’s liabilities – and thus the urge by many plan trustees to insure against a healthier, and thus potentially livelier, population.

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According to Reuters, Matt Wilmington of Hewitt stated that the higher costs stemming from longevity have come to the forefront of pension liability management. Already, a third of FTSE 100 companies have altered calculations relating to pensioner longevity, which will, inherently, increase liabilities. In total, the entire FTSE 100 pension liability stood at nearly US$600 billion.

For an ai5000 magazine article on the problems with longevity in both the UK and United States pension system, see “The Problems on Whisky and Women .”

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

Having lost 20% of its value, the mighty Bill & Melinda Gates Foundation has turned to a novel investment approach to retain capital while still putting it to work.

(October 8, 2009) – In an effort to mitigate a 20% decline in assets, The Bill & Melinda Gates Foundation—America’s largest—is turning to a novel investment approach.

According to The Chronicle of Philanthropy, the $30.2 billion foundation (167 in a list of world asset pools as ranked by ai5000) has allocated $400 million to an investment program focused on loans, bond guarantees, and equity investments. Like most Gates grants—of which there are $3.5 billion each year—the investments (often referred to as program related investments, or PRI) will be focused on Africa.

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The investment branch of the foundation will borrow the funds from the endowment branch, according to The Chronicle, and use the funds to give out low-interest loans reminiscent of microfinance, as well as equity investments in health technologies.

According to The Seattle Times, three such investment have been made already: $20 million to microfinance credit firm Africa ProCredit Holdings; $20 million to microfinance-scaling firm ASA International Holdings; and $10 million to commercial bank expansion firm Opportunity Transformation Investments. Such investments can be quite risky, but also can turn into quite profitable ventures under the right circumstances. Any returns from the investments will be diverted back into the endowment arm of the fund.

However, according to Gates Foundation CFO Alex Friedman, the fund expects some deals to fail and returns to be minimal. “Given that there’s less resources right now available for all of us, including the Gates Foundation, and we don’t want to lower our commitment, is there any way we can come up with a new set of tools?” Friedman is quoted as saying. This move marks a stark contrast with the previous investment strategy for the foundation’s endowment, which was purely to maximize profit.

According to The Chronicle, although this tack has been taken before by nonprofits, the sum provided by the Gates Foundation is unprecedented.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>