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The Actuary The magazine of the Institute & Faculty of Actuaries

Longevity risk remains key concern for DB stakeholders

Longevity risk is one the main worries for defined benefit pension scheme sponsors and trustees but remains the least successfully managed, according to research by MetLife Assurance.

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’ for longevity risk increased from 28% in 2010 to 38% in 2011. Despite the concerns, both groups continue to report that longevity risk is the least successfully managed risk again in 2011.

Commenting on the 2011 UK Pension Risk Behaviour Index, CEO Dan DeKeizer said: "Whilst 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. 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, the firm said. 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.

Emma Watkins, director of business development, added: "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."