A new insurance approach to longevity risk

In a claimed world first, UK pension
scheme buyout specialist Pension Corporation has launched a
longevity insurance product designed to protect defined benefit
pension funds and their sponsors against the cost of pensioners
living longer than expected. The product is offered by Pension
Corporation’s Pension Insurance Corporation (PIC) unit which has
the capacity to underwrite up to £20 billion ($39.5 billion) of
pension liabilities.

The policy offered by PIC 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. The policy will remain in force until the death of a
pension fund’s last covered pensioner or their dependant, such as a
spouse.

According to Pension Corporation, PIC’s longevity insurance product
differs from other products in the market in a number of ways.
These include:

• It is not a derivative instrument but an insurance policy from a
fully regulated insurance company;

• 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;

• The policy 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 10
years; and

• The policy requires no upfront payment, so 100 percent of the
pension fund’s assets remain fully invested and earning returns for
the fund.

The product, explained Pension Corporation, was developed in
recognition of the fact that life expectancy is increasing in the
UK. For example, 65 year-old men can today expect to live 4.5 years
and women 3.2 years longer than they did in 1980. The company added
that the rate of improvement in male longevity continues to
increase faster than for women and currently male life expectancy
is increasing by one year every five years.

It is estimated that an improvement in life expectancy by one year
increases the liabilities of the average fund by more than 3.5
percent, according to Pensions Corporation.