Employers that sponsor defined benefit schemes are directly exposed to the risk that the scheme’s experience will be different from what’s expected. Finance directors and treasurers are used to dealing with the management of financial risks, but “longevity risk” – the risk that scheme members will live longer than expected – has begun to be included in the risk menu.
The scrutiny of the mortality assumption has been further driven by the Pensions Regulator, who has made it very clear that trustees should take account of their members’ characteristics and any assumptions should be “evidence based”.
This presentation created by Redington in July 2008 provides a technical analysis.
Trustees of smaller schemes have struggled to access information on their scheme specific longevity.
Longevitas are offering a service that for an indicative price of £2.50 per member offers a detailed analysis of scheme specific mortality. This service has been “white-labelled” by Mercer and is in use at the PPF.
Advisors could contract with Longevitas -selling on this service with FA value add on a white labelled basis. You can access the details at www.Mortalityrating.com.
The service seems of particular value to schemes considering buy-out or buy-in whether on a scheme wide or partial basis.
It seems likely that small schemes will also have the option of using longevity swaps in the not too distant future. This is an extract from a recent edition of Pensions Week.
The first pension scheme longevity swap based on national, rather than scheme specific, life expectancy figures will complete in the next few weeks.
Because of its non-bespoke nature, the product is considerably cheaper than a full longevity swap and is aimed at offering smaller schemes an affordable alternative.
Under the terms of the deal, which involves JP Morgan’s Life Metrics derivative product, £100m of deferred member assets will be hedged out for an as yet unnamed scheme.
Trustees should be able to understand what is fair value before taking decisions on annuity purchase, this is even more important when considering entering into a longevity swap. A well informed trustee board may find , if armed with detailed information on their scheme’s mortality, an opportunity to find more than”fair value” from either option- a further benefit of using such a service.