GLOBAL - The development of longevity as an asset class continues to grow as longevity risk becomes increasingly recognised, experts believe.
Delegates at the Longevity 7 conference in Frankfurt, Germany last week heard how longevity markets could provide investors with the opportunity to earn attractive returns.
David Blake, conference chairman, professor of pension economics and director of the Pensions Institute at Cass Business School said: "Longevity risk is an increasingly important risk to recognise, quantify and manage for both pension plan and annuity providers, as well as for governments and individuals. Getting the right trend improvements in life expectancy is the key both to managing this risk and to creating an asset class acceptable to investors to buy into.
"However, this has proven to be difficult to realise in the past; even official agencies have systematically underestimated previous mortality improvements. Pension plan and annuity providers are beginning to question whether longevity is a risk they should be assuming on an unhedged basis, and the capital markets are beginning to offer solutions for managing and unloading longevity risk."
Société Générale managing director and head of insurance and pension solutions Jeff Mulholland added: "The opportunity to relative trade the micro-longevity and macro-longevity markets is becoming compelling.
"With spreads likely to tighten in the micro-longevity market due to market forces, investors will have the opportunity for potential mark-to-market gains over time, whilst the amount of longevity risk that needs to be hedged globally suggests macro-longevity spreads may widen over time, leading to opportunities for returns for investors who trade longevity."
Amy Kessler, a retirement expert at Prudential's (Pramerica in the UK) Retirement division said the UK was leading the way in pension plan de-risking.
"Progress in the UK has been driven by regulation, accounting transparency and risk awareness among pension schemes that has led to dramatic changes in risk management and governance. Many of the same catalysts for change are arriving in the US today," she said.
"As US pension plan sponsors face these changes, there is broad recognition that their current risk position is unsustainable. While affordability remains an issue, techniques used in the UK for reducing and transferring risk have crossed the pond."
Raimond Maurer, professor of investment and pension finance at Goethe University, and co-organiser of the conference, added: "In the twentieth century, state-organised pension programmes shouldered the lion's share of financial provision for the elderly. In the twenty-first century, however, retirees are likely to depend very heavily on privately organised funded old-age protection, such as private occupational pension plans and life annuities.
"Yet, the financial institutions that are supposed to supply these products, such as pension funds and life insurers, face substantial difficulties in managing systematic longevity risk. One possible solution to this problem might be the transfer of a reasonable proportion of this longevity risk to the capital markets. This, however, requires investors to accept longevity-linked instruments as an appealing asset class."
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