Swiss Re warns on longevity risk to pensions

*Insurers face increased liabilities

*Calls for tradable market in hedging against longevity

LONDON, August 31 (BestGrowthStock) – Underestimating life
expectancy could lead to a sharp increase in pension plan
liabilities, Swiss Re (RUKN.VX: ) said, as the issue of people
living longer gains traction in the financial services industry.

Continued improvement in longevity due to healthier
lifestyles and better medicine increases the liabilities held by
insurers, reinsurers and pension funds, which Swiss Re warned
could result in more expensive pensions.

Underestimating life expectancy by just one year can
increase a pension plan’s liabilities by up to 5 percent, the
world’s second biggest reinsurer said in a report on Tuesday.

For a pension plan with $1 billion of assets, an extra $50
million would need to be funded, said Swiss Re.

The reinsurer called for governments and the insurance
industry to encourage the development of a tradable market in
hedging against longevity.

Swiss Re said longevity risk could be transferred to the
capital markets in the same way that some of the world’s biggest
perils, such as hurricanes and earthquakes, are protected
against by shifting the risk to investors via catastrophe bonds.

Globally, more than $17 trillion worth of pension assets
are exposed to longevity risk – mainly in the Americas and
Europe and particularly the UK, Swiss Re said in the report.

Currently, the majority of employees use annuities – where
employers and individuals pass on the risk of providing
retirement income to an insurer – and defined benefit plans to
hedge against longevity risk.

Defined benefit plans are company retirement plans, where a
retired employee receives a specific amount based on salary
history and years of service, and the employer bears the
investment risk.

“The lack of risk-transfer capacity could drive up the cost
of annuities and defined-benefit pensions, with a further,
increasingly unsustainable, burden on the state,” said Swiss Re.

Last week, the Life and Longevity Markets Association
(LLMA) of banks and insurers launched the methodology and
governance framework for a longevity index.

The LLMA wants to transfer the UK’s 2 trillion pounds
pension liability assets to the capital markets to help pension
schemes and insurers manage the financial pressure of increased
life expectancy.

For more information on the insurance-linked securities,
click https://inside.thomsonreuters.com/trading/ils.

To see the full report from Swiss Re, click here
https://space.reuters.com/Trading/ils/Documents/Swiss%20Re%20reports/Swiss%20Re%20longevity%20report%20-%20August%202010.pdf

(Editing by Erica Billingham)

Swiss Re warns on longevity risk to pensions