UK - Pensions executives have raised concerns about the growth of the longevity hedging market, as some individuals are concerned about whether there is enough capacity and transparency in the market to assist the majority of pension plans.

A study released by ClearPath Analytics suggesting, entitled Longevity Hedging for Pnesion Plans, has found there are still very mixed views about the potential for pension funds to hedge against ageing populations and its impact on pension liabilities.

In particular, both Ian Chisholm, general manager of the trustee services unit at Shell UK and Penny Green, CEO of Saul Trustees believe the sheer complexity and lack of transparency regarding transactions is still a key concern putting many pension trustees off the use of longevity hedging.

"We're still waiting for the longevity hedging market to become transparent and to be clear, so that you can judge whether the risk management is worthwhile," said Chisholm.

Likewise, Green said: "I think one of the issues is the sheer complexity of establishing the longevity swap in the first place. It's something that would have to be monitored over time, together with the collateral. I think it is a more complex way of achieving an objective relative to an insurance company," she suggested.

Their comments were made during separate roundtable discussions, hosted by ClearPath, and then collated as part of a larger book of analysis on the relatively new longevity market.

One of the key difficulties pension trustees raised when considering whether to enter into a pensions buyout or swap is not actually the longevity of the members, suggested Ian Richards, chair of the trustees at the Next Pension scheme, but the impact of other decisions being made, such as whether spouses also receive benefits.

"I would say there are certain elements that are in fact very simple to do. For example, to look at what sort of assumptions are being made in respect of the amount of tax-free sum that being taken, and the proportion of members who take spouses or partners benefits. The assumption can be very different from reality," he noted.

"It's not so much the longevity of the member that's important but the longevity of the partner as the majority of people in defined benefits pensions have a dependent of some description," added Richards.

As well as noting that longevity deals have so far only been signed against pensioners, he also fears that as time passes, the actual deals being signed will eventually lead to the hedged risks being passed to other parties, and eventually place the pension fund under pressure elsewhere.

My fear is that as this grows and time goes by, there will be more and more passing on of some of the risk of some of the providers through to the reinsurance. There's concern, therefore, that too much risk will end up in the same place without the buyers realizing it. What you start off with isn't necessarily what you end up with and that could mean an ever-increasing counterparty risk," said Richards.

Geoff Reader, head of pension fund and treasury management, Bedford Borough Council, believes the issue may not be where the risks are placed, but there there will also be sufficient capacity in the future to meet trustee demands.

"If this market takes off, is it big enough," said Reader. "It could be a condition of buyout that you need to have hedged your longevity but the market might be saturated."

In contrast, John Chilman, group pensions director at First Group, believes trustees may need to tread carefully in this new market as its long-term direction is still not clear and providers' intentions are still uncertain.

"I'm concerned that with an investment bank, they'll just take a view and say, ‘is there enough profit to do this?' If they think ‘right, there's enough profit to do this', then they'll write the business.If mortality keeps improving, and this is the real concern here, who knows if it is going to keep on going up or if it's going to grow exponentially."

He continued: "And when they realise that they got it wrong 20 years or so down the line and it's then costing them an arm and a leg, what are they going to do at that point?"

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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