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The odds that you'll have a long, healthy life are better than ever ... and that creates a pretty hefty problem for pension funds. They need to find new ways to meet their obligations in a turbulent market, and the risk that you'll hang on forever is approaching every day. So, unless we're able to pass legislation encouraging mass suicide among the Baby Boomers (it's a joke, people, read Christopher Buckley's Boomsday to see how it shakes out), pension fund managers have a hefty dose of risk to offload -- fast. They're looking at the insurance-linked securities market as a way to handle the problem.All joking aside, pension funds and insurers are translating to total pension liabilities of $19 trillion in the U.S. and $3 trillion in the UK, according to a Reuters report using data from International Financial Services London. And, an increase in longevity by one year could translate into a 3% jump in liabilities. Put simply, the IFSL's data means another $600 billion in the U.S. and $90 billion in the UK. Basically, everything we do to stick around longer (not that I'm discouraging it) leads to a higher and higher price tag.
According to John Fitzpatrick, a partner at Pension Corporation and a director of the new Longevity and Life Markets Association, "In the UK alone in the next 20 years, there is set to be a 60% increase in the number of retirees. This will create a huge financial risk to pension funds, governments and local authorities who run pension schemes."
By using insurance-linked securities, pension funds may be able to offload longevity risk. Rather than use traditional buy-ins and buy-outs with pension insurers, they are looking to securitization transactions such as longevity swaps. Three such transactions were closed last year, including a June 2009 deal between Babcock International and Credit Suisse (CS) for $470.7 million. RSA (RSA:UK) and Goldman Sachs (GS) completed a longevity transaction, as well. And in December, Swiss Re (SWCEY) and Royal County of Berkshire Pension Fund, inked a $1.59 billion longevity deal.
"Longevity is an ideal instrument to securitize, and it has many features relevant to the fixed income market and the ILS sector," said David Rawson-Mackenzie, managing director at Centurion Fund Management. Rawson-Mackenzie's company kicked off its first macro and micro longevity fund in Luxembourg last year. "The ILS market has managed to securitize hurricanes and earthquakes risks through cat bonds, and there is no reason why it can't be done with longevity."
He calls it the "Holy Grail for the ILS market."
By using insurance-linked securities, pension funds may be able to offload longevity risk. Rather than use traditional buy-ins and buy-outs with pension insurers, they are looking to securitization transactions such as longevity swaps. Three such transactions were closed last year, including a June 2009 deal between Babcock International and Credit Suisse (CS) for $470.7 million. RSA (RSA:UK) and Goldman Sachs (GS) completed a longevity transaction, as well. And in December, Swiss Re (SWCEY) and Royal County of Berkshire Pension Fund, inked a $1.59 billion longevity deal.
"Longevity is an ideal instrument to securitize, and it has many features relevant to the fixed income market and the ILS sector," said David Rawson-Mackenzie, managing director at Centurion Fund Management. Rawson-Mackenzie's company kicked off its first macro and micro longevity fund in Luxembourg last year. "The ILS market has managed to securitize hurricanes and earthquakes risks through cat bonds, and there is no reason why it can't be done with longevity."
He calls it the "Holy Grail for the ILS market."
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