A total of 60% of companies are looking to hedge longevity risks within their pension schemes, according to research from management consultancy Watson Wyatt.
The survey of 70 senior finance, treasury and pensions executives from companies with defined benefit (DB) pension schemes shows 25% have taken steps to control longevity risk through methods including mortality risk transfer products and mortality sharing benefit design. A quarter have considered hedging and 8% intend to hedge or buy-out.
Steven Dicker, a senior consultant in Watson Wyatt's corporate consulting group, says: "Unanticipated increases in life expectancy can represent a significant un-hedged risk for pension schemes. We are finding that longevity is increasingly being looked at in conjunction with value at risk analyses and other risk management techniques.
“Benefits are being redesigned to offset longevity increases, and a market is developing to allow schemes to insure or 'swap away' longevity risk."
The consultancy says some companies have considered benefit design changes that introduce a mortality sharing factor so at retirement, companies would scale back benefits earned according to the standard formula if longevity increased faster than expected.
Previously companies have typically reduced the benefit formula or made members pay more to reduce cost or risk generally rather than specifically to mortality.
Other alternatives include mortality swaps, such as JP Morgan's q-forwards.
Dicker says: "At this stage they are probably only viable for medium to large schemes. But this may represent the start of a trend similar to that seen recently with interest rate swaps, where pooled fund type approaches make these more sophisticated techniques available to smaller schemes.
“However, standardised approaches leave a basis risk between the standard mortality measure and the scheme's actual experience. For transactions between life insurers, and probably for large schemes, swapping on the basis of your scheme's own mortality experience is now a real possibility."
The survey also shows 30% of companies believe their share price shows sensitivity to their pension risk. Dicker says the figure perhaps reflects a growing interest in pensions risk from analysts and investors.
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