Pension Insurance Corporation has launched a new insurance product to protect defined benefit pension funds and their sponsors against the cost of pensioners living longer than expected.
The policy will reimburse pension funds for the cost of any future pension payments that arise from pensioners living longer than expected. In return for this protection pension funds will pay fixed annual premiums set at the inception of the policy.
It will remain in force until the death of a pension fund’s last covered pensioner or their dependant, such as a spouse.
Pension Corporation developed the longevity insurance product in recognition of the fact life expectancy is increasing in the UK. Sixty-five-year-old British men can today expect to live 4.5 years and women 3.2 years longer than they did in 1980. This trend is accelerating and currently male life expectancy is increasing by one year every five years. The rate of improvement in male longevity continues to increase faster than for women.
It is estimated that an improvement in life expectancy by one year increases the liabilities of the average fund by more than 3.5%. Improving longevity means pensioners draw their benefits for longer and this increases pension fund liabilities.
Key features of the new policy are:
- It is an insurance policy from a fully FSA-regulated insurance company and is not a derivative instrument
- The policy covers the specific longevity risk of the pension fund, rather than the longevity risk of the population at large, as in an index product
- It covers the pension fund for “whole of life,” until the death of a pension fund’s last covered pensioner or their dependant; as compared to products that provide cover for only ten years
- The policy requires no upfront payment, so 100% of the pension fund’s assets remain fully invested and earning returns for the fund
The company believes the policy should appeal to large pension funds that have no plans for buyout or those that plan to buyout in the future and want to retain 100% of their assets in the pension fund.
Sir Mark Weinberg, chairman of Pension Corporation, comments: “Our approach will be to work closely with a pension fund, its trustees and advisers to tailor solutions that are appropriate to a fund’s longevity profile and presented in a clear policy.”
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