Defined benefit pension scheme sponsors and trustees alike remain concerned by longevity risk and the impact increased longevity can have on scheme liabilities, according to the according to the MetLife Assurance 2011 UK Pension Risk Behaviour IndexSM (UK PRBI).
The study of 89 sponsors and trustees analysed how each group viewed 18 investment, liability and business risks that affect their pension schemes, and assessed how well they believed they were managing those risks. Among both sponsors and trustees, the importance selection rate, or the number of times longevity risk was selected as important by respondents, increased from 28% in 2010 to 38% in 2011.
Dan DeKeizer (pictured), Chief Executive Officer, MetLife Assurance Limited says: “Whist improvements in life expectancy are good for individuals, longevity risk is a key driver of the pressure that DB schemes face and its financial impact on DB schemes should not be underestimated. The risk is that a broad and sustained improvement in longevity may occur and significantly lengthen scheme members’ life spans. While the resultant increases in pension payments may not emerge for many years, from a valuation and accounting standpoint there will be an immediate increase in the value of the schemes liability. Where the scheme sponsor absorbs the longevity risk, this may result in higher levels of contribution to the scheme.”
longevity risk increased in importance most significantly among trustees. According to the inaugural UK Pension Risk Behaviour Index, issued in 2010, longevity risk was the fourth most important risk to trustees in 2011 and its importance selection rate increased from 24% in 2010 to 38% in 2011. Among sponsors, for whom longevity risk was the fifth most important risk factor this year, the importance selection rate increased from 31% to 38% year on year.
Whilst important among sponsors and trustees, both groups continue to report that longevity risk is the least successfully managed risk again in 2011. Given its unpredictability, longevity risk is a challenging risk to manage and consequently, pension schemes are increasingly looking to mitigate, reduce or transfer longevity risk.
Emma Watkins, Director of Business Development, MetLife Assurance Limited, says: “By adopting prudent assumptions, the future effects of this risk can be minimised in exchange for higher funding today. Though some tools do exist in the market for hedging or transferring longevity risk, they are in their infancy and the take up rate among schemes is quite small. longevity risk is likely to remain high on the list of concerns of trustees and sponsors, as their success at managing this risk may take some time to develop.”
Dan DeKeizer adds: “The impact of longevity risk has been a consistent front burner issue for schemes, and is clearly a very understandable and challenging risk for trustees and sponsors. When deciding how best to manage longevity risk, sponsors and trustees need to first understand and examine their assumptions. The best way to do this is to ensure the accuracy of member data. Interestingly, the 2011 UK PRBI found that scheme sponsors lowered their Average Success Rating for managing the Quality of Member Data, and trustees increased their Average Success Rating for managing the Quality of Member Data. Given the increased focus by TPR on data quality, a number of trustee boards have taken action on data and therefore feel more comfortable with it. It remains to be seen if trustees are adequately communicating with their sponsors about the action they have taken or plan to take.”