Tackling longevity risk is rising up the priority list as more UK defined benefit (DB) pension schemes review their chosen endgames, according to Aon.
The positive changes in DB scheme funding over the last couple of years have presented new challenges and opportunities for schemes and a different set of decisions for trustees and sponsors. Many are reviewing their risk management strategies either as part of plans to run-on for an interim time before moving to a buy-out, or as part of a long-term run-on endgame. Tackling longevity risk is increasingly a vital part of these strategies. Combined with the attractive solutions and pricing which the global reinsurance market is offering, Aon expects activity in the longevity market to increase.
“Many schemes have benefited from significant funding level improvements, have substantially mitigated market risks such as inflation and interest rates, and are now re-assessing their residual risk exposures and how to optimise strategies. Irrespective of the endgame being targeted, longevity and broader demographic risks will increasingly be dominating their thinking,” said Matthew Fletcher, Head of the Demographic Horizons team at Aon.
“These risks are real and material – we have recently seen changes in liability values of more than two percent over a single year, solely due to re-calibration of the Continuous Mortality Investigation mortality projection model. Compound this with longer term impacts – medical developments such as the expansion of GLP-1 medications, or increased use of artificial intelligence within the healthcare sector, as well as other macro-factors such as changes in government spending on the National Health Service – and it’s clear that these risks have real potential to significantly impact a scheme’s timescale for achieving its endgame goals.”
“The good news is current pricing to mitigate these risks is highly attractive. The longevity risk hedging market – supported by global reinsurance market appetite for UK longevity risk – is well established. What has changed in recent years is the pricing of this risk – it has reduced dramatically while a wider size-range of schemes have been able to hedge it through longevity swaps, both for current and future pensioners,” added Hannah Brinton, Partner in the risk settlement team in the UK for Aon.
“A number of factors are driving this attractive pricing, including the highly competitive reinsurance landscape and the higher interest rate environment. The expanded accessibility to schemes – longevity swaps are no longer the sole preserve of £1bn+ schemes – has been facilitated by reinsurance market appetite and structural simplifications. Importantly, hedging longevity risk is entirely compatible with retaining flexibility for later annuity purchase – so it fits with both run-on and buyout endgames. Taken together, these developments mean longevity risk management should be a priority item on trustee and sponsor agendas.”
