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A number of innovative deals have transformed the potential of longevity swaps to help defined benefit pension schemes to manage longevity risk. Here, Stewart McLaughlin, Willis Management (Guernsey), explains the nature of the advance and what it might mean for this form of risk transfer.
In a matter of months, a couple of longevity swaps transformed the way defined benefit pension schemes can manage longevity risk.
Defined benefit pension schemes promise an annual payment to their pensioners for as long as their retirement lasts and (thankfully for humanity) it is lasting longer than previously expected. Past forecasts have consistently underestimated how long we will live so longevity risk for defined benefit pension schemes has been the elephant in the room.
A longevity swap transfers the risk of pension scheme members living longer than expected to another party. The payments of the pension scheme are thus fixed, based on an expected mortality assumption and the other party settles the actual payments to the pensioners.
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Longevity, ILS, Willis Management (Guernsey)