The remarkable growth in the pension risk transfer market in the past few years has caught the eye of the trade media, investors – and regulators. But the transferring of longevity risk from pension funds was discussed long before it became a ‘thing’. Greg Winterton spoke to John Kiff, formerly of the International Monetary Fund, and now an independent consultant, to get his views on how the industry has evolved since he first started discussing it in the mid-2000s.
GW: John, you were discussing the longevity risk transfer market back in 2006 when you worked at the IMF. Go back to that time. Did you ever think that the market would be as large and active as it is now?
JK: I thought it would be larger and more active than it is now. In particular, I thought that by now there would be more longevity risk transfer to capital markets, as opposed to those just between (re)insurers. I was encouraged by the 2012 €12 billion longevity swap between Dutch insurer Aegon and Deutsche Bank that used standard ISDA documentation and was targeted specifically at institutional investors, and the similar 2013 Aegon €1.4 billion deal structured by Société Générale. All payments were based on longevity indices based on publicly available data, rather than the actual longevity experience of Aegon’s annuity book. And the deals had 20-year maturities with close-out mechanisms that determined final payment. However, although there continue to be large transfers into (re)insurance markets, there haven’t been any further attempts to transfer longevity risk to capital markets.
GW: You co-authored a paper, The Limits of Market-Based Risk Transfer and Implications for Managing Systemic Risks, in 2006. What’s your view on the regulatory environment in terms of how, and/or if, it has evolved to support the space?
JK: I don’t think much has changed at all. In most jurisdictions, only traditional reinsurance transactions, where cash flows are based on the cedant’s actual longevity experience, may provide a primary longevity risk insurer with regulatory relief. This makes risk transfers based on longevity indices, like the Aegon transactions, unlikely to get traction, at least in the current regulatory regime. There will need to be something specific that happens for capital market participation in longevity risk transfer to really get moving.
GW: The International Monetary Fund staff called attention to concentration risk in UK pension scheme buy-out markets in their 2024 Article IV mission concluding statement. Where on the spectrum of concern are we in terms of this pile of longevity risk accumulating at the reinsurance level?
JK: Concentration risk is certainly something that bears watching. Since 2009, about 80% of completed UK longevity risk transactions have been concentrated in just four (re)insurers. However, this is not an extraordinary degree of concentration in wholesale capital markets, for example over-the-counter derivatives markets. Nevertheless, it takes us back to a need for the development of ways for (re)insurers to share these risks, ideally outside the (re)insurance sector. And as we said in that 2006 paper, there are capital markets players that take longer-term investment positions that would make ideal counterparties for such transfers, like private equity firms and sovereign wealth funds.
GW: What’s something that you personally would like to see change in the longevity risk transfer market, and why?
JK: I would like to see longevity risk become tradeable – which is what I thought was going to happen when I was looking at this space nearly twenty years ago – but the obstacles seem to be manifold. (Re)insurers get little to no regulatory relief for risk transfers outside the (re) insurance industry, maybe there’s simply no capital markets appetite for it, or the right transfer instrument design hasn’t been discovered/developed yet.
GW: Finally, John: Looking ahead five years or so. What do you think – hope – the longevity risk transfer market will look like?
JK: I suspect, sadly, that things won’t be much different at all. There will still be plenty of pension scheme to insurance company transfers in the bulk annuity market, except that maybe the appetite for these deals will begin to peter out somewhat. As I’ve said, there doesn’t seem to be much in the way of regulatory action to support the involvement of the capital markets and so I think that the status quo will remain. I hope I’m wrong.
John Kiff is CEO at Kiffmeister Consulting