Many public and private employer pension funds have under-reserved for longevity risk, a new report from Swiss Re reveals.
The report, Longevity risk and protection for Canada, provides some solutions insurers may wish to think about.
The report identifies more than $1 trillion of pension assets and immediate annuity reserves as “at risk” in Canada as of 2010.
The report recommends pension plans assess their exposure to longevity risk and decide whether and how to pass this risk on to a third party. The report also notes that insurers can work in partnership with reinsurers to develop robust approaches to mitigating longevity risk.
“Increasing life expectancy is one of the greatest achievements of the 20th and 21st centuries; however, pension funds and annuity providers may have underestimated how long their members and policyholders will live. To protect their solvency and ensure they can continue to provide retirement income, these entities can now transfer some of their longevity risk,” explains Kurt Karl, head of economic research and consulting at Swiss Re.
The report clarifies that longevity risk is not a diversifiable risk. Yet longevity risk solutions, including re/insurance, can be used to transfer this risk to a third party. By indemnifying themselves against future unexpected life expectancy increases, pension plans and insurers can focus on other issues, such as their asset risk exposure.
Key figures from the report include:
- Global pension assets exceed $20 trillion, including about $1 trillion in Canada.
- Global reserves backing immediate annuity books of business exceed $637 billion, including about $60 billion in Canada.
- The market for longevity risk solutions—including buy-outs, buy-ins, longevity re/insurance, longevity swaps and longevity bonds—is expected to grow to CAD $180-315 billion in total assets transferred by 2020.
- The above volume of transactions, assuming Canada shared proportionally in the total volume of deals, would imply a notional outstanding amount of around $10-20 billion for longevity risk transferred in Canada over the decade through 2020.