Swiss Re proposes solutions to longevity funding issues

Swiss Re report calls on insurers, governments and pension providers to grasp the nettle of longevity funding issues.

In a report entitled “A short guide to longer lives: Longevity funding issues and potential solutions,” Swiss Re says that prompt concerted action in the form of public-private partnerships needs to be at the heart of strategies to tackle the risks associated with increased life expectancy.

In a recent analysis, United Nations experts say that “population ageing is without parallel in the history of humanity.”  At the world level, the report goes on, the number of people over 60 is expected to exceed the number under 15 for the first time in 2045. In the more developed regions, where population ageing is far advanced, the number of children dropped below that of older persons in 1998.

The so-called Methuselah effect is set to have a profound impact on many aspects of human life - on economic growth, savings, investment, consumption, labour markets, life styles, taxation, healthcare and pensions.

Global ageing is a wonderful success story. The fact people are living longer and generally healthier lives is a triumph of medical progress and economic development over disease, factors which have constrained human life expectancy for thousands of years.  But this phenomenon does pose massive challenges, not least of which lie in the area of pension funding. Longevity risk means that pension plans could face shortfalls resulting from increased life expectancy. This is in addition to the declines in asset values triggered by the economic downturn. And this is one of the problems that Swiss Re addresses in its report (See 'A short guide to longer lives' at the right).

But the study not only highlights the issues involved – such as the negative impact on pension liabilities caused by under-estimating life expectancy – it also makes recommendations and proposes solutions. And not just on paper.  A case in point was the recent longevity transaction Swiss Re structured for a British pension fund. The transaction provides the UK’s Royal County of Berkshire Pension Fund (RBPF) protection against the uncertainty associated with retirees’ rising life expectancy. The longevity risk involved amounts to CHF 1.7 billion of pensioner liabilities.

Says Head of Swiss Re’s Life & Health Division, Christian Mumenthaler: “While life expectancy is on the increase, the time required for implementing effective longevity funding solution is running out. Insurers, governments and pension providers must act now to ensure that living longer remains a benefit to society rather than a financial burden.”

Published: 31 August 2010