Is longevity risk eternal?

We all hear about life expectancy and that generally people are living longer. Take a typical 60 year old man in the UK back in the 1980s, his life expectancy was age 78. Actuaries today have estimated that a 60 year old man will live till 87!

Developments in the fields of medicine and technology continue to improve our life expectancy. There have been many advancements which have resulted in prolonged life and further progressions are in the pipeline.

So what does this mean for pension funds?

Actuaries have estimated that for a pension fund with £500m of pensioner liabilities, each extra year of life expectancy adds £25m to the cost of providing members’ benefits. So how are pension funds coping with this increase and will they be able to continue to afford our retirement? Is their exposure to longevity risk to continue eternally?

In recent years some pension schemes have hedged longevity risk using insurance placed with third party institutions, such as banks and insurers (who then pass this risk to the reinsurance market), for what some may consider a significant cost. However, in recent times the financial crisis and increased capital requirements have dramatically reduced the capacity for these institutions to offer such transactions.

There remains capacity and appetite in the global reinsurance market for longevity risk. However, reinsurers are not licensed to write direct business with UK pension funds and do not typically provide all the administration and operational services required to transact directly.

Managing the risk

An efficient and cost effective solution to this problem is for the pension scheme to establish a captive insurer which can pass the longevity risk of the scheme straight through to the reinsurance market. This provides a flexible way to mitigate longevity risk other than through traditional methods.

In 2014, the BT Pension Fund (“BT”) announced a longevity hedge covering £16bn of their pensioner liabilities through this mechanism.

What if your company is not as big as BT? We saw Artex (the captive management company running the BT structure) developing a solution for the wider market. Artex launched a special purpose insurance company called Iccaria Insurance ICC Limited (“Iccaria”) to enable pension funds to use it in a similar manner to BT and access the reinsurance market at a lower cost than current options available.

Iccaria is an Incorporated Cell Company set up to facilitate more of these deals opening this structure up to small transactions, potentially as low as £250m. Could this be the right solution for your longevity risk?

If you need more details, please get in touch.

Irena Di Re
PwC | Deals
Office: +44 (0)20 7213 1736
Email: [email protected]


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