GERMANY: Longevity markets provide investors with opportunity

BEVERLY HILLS,  California / The American Chronicle / September 12, 2011

The development of longevity as an asset class growing,
according to experts

The development of longevity as an asset class continues to grow as longevity risk becomes increasingly recognised, and as longevity markets provide investors with the opportunity to earn attractive returns, according to the findings of a recent international conference.

The seventh annual Longevity Risk and Capital Markets Solutions Conference1 held at Goethe Universi­ty in Frankfurt last week saw leading international industry and academic minds discuss the assessment of longevity risk, as well as the type of instruments needed by pension funds and insurance companies to hedge such risk.

Dr. David Blake, Professor of Pension Economics and Director of the Pensions Institute at Cass Business School, and chair of the conference, said: "Longevity risk is an increasingly important risk to recognise, quantify and manage for both pension plan and annuity providers, as well as for governments and individuals. Getting the right trend improvements in life expectancy is the key both to managing this risk and to creating an asset class acceptable to investors to buy into.

"However, this has proven to be difficult to realize in the past; even official agencies have systematically underestimated previous mortality improvements. Pension plan and annuity providers are beginning to question whether longevity is a risk they should be assuming on an unhedged basis, and the capital markets are beginning to offer solutions for managing and unloading longevity risk."

* Pension providers, like Prudential, are positioned to help defined benefit plans manage longevity risk challenges and are working with key stakeholders to make changes and find solutions to keep pension schemes sustainable over the long term and help secure pensions."

Amy Kessler, a retirement expert at Prudential Retirement, spoke of the UK's leading role in pension plan de-risking: "Progress in the UK has been driven by regulation, accounting transparency and risk awareness among pension schemes that has led to dramatic changes in risk management and governance. Many of the same catalysts for change are arriving in the US today."

"As US pension plan sponsors face these changes, there is broad recognition that their current risk position is unsustainable. While affordability remains an issue, techniques used in the UK for reducing and transferring risk have crossed the pond."

"Pension buy-in transactions have just arrived in the US and longevity insurance will follow but demand will likely be modest until there is greater awareness of pension longevity risk in the US."

Dr. Raimond Maurer, Professor of Investment and Pension Finance at Goethe University, and co-organizer of the conference, said: "In the twentieth century, state-organized pension programs shouldered the lion's share of financial provision for the elderly. In the twenty-first century, however, retirees are likely to depend very heavily on privately organised funded old-age protection, such as private occupational pension plans and life annuities. Yet, the financial institutions that are supposed to supply these products, such as pension funds and life insurers, face substantial difficulties in managing systematic longevity risk. One possible solution to this problem might be the transfer of a reasonable proportion of this longevity risk to the capital markets. This, however, requires investors to accept longevity-linked instruments as an appealing asset class."

Jeff Mulholland, Managing Director and Head of Insurance and Pension Solutions at Societe Generale, who spoke at a special session on longevity as an asset class at the conference said: "The opportunity to relative trade the micro-longevity and macro-longevity markets is becoming compelling.

With spreads likely to tighten in the micro-longevity market due to market forces, investors will have the opportunity for potential mark-to-market gains over time, whilst the amount of longevity risk that needs to be hedged globally suggests macro-longevity spreads may widen over time, leading to opportunities for returns for investors who trade longevity."

A full summary of the conference can be found at: http://www.longevity-risk.org/, or by contacting Professor David Blake: D.Blake@city.ac.uk.

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