UK Pension Plans Express Increasing Concern Over Longevity

(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.

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.