Pension schemes wake up to longevity risk

PensionersLongevity risk is increasingly important for defined benefit (DB) pension schemes and yet it was still nominated as the least successfully managed risk by participants in a survey by the insurance firm MetLife Assurance.

Longevity risk was selected as important by 38% of the sponsors and trustees in the survey, up from 28% last year, making it the fourth most important factor. The most important factor was the risk of a funding deficit.

Longevity risk is difficult to manage because it is unpredictable. Advances in medicine mean the average lifespan is increasing in developed countries, but the rate at which this change is happening is hard to quantify and it is difficult to predict the effect further breakthroughs may have. DB pension schemes are dangerously exposed to this risk as they are required to provide beneficiaries with pensions as long as they live.

MetLife Assurance says strategies for mitigating the cost of increased longevity may attract more attention from DB schemes in future, though the market for these instruments is still modest.

“While some tools exist in the market for hedging or transferring longevity risk, they are in their infancy and take-up rate among schemes is still quite small,” said the report. “This risk is likely to remain high on the list of concerns of trustees and sponsors, as their success at managing this risk may take some time to develop.”

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