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The Actuary The magazine of the Institute & Faculty of Actuaries

Sessional meeting: Financial aspects of longevity risk

There was a full house at Staple Inn on 26 October for the presentation of ‘Financial aspects of longevity risk’. The SIAS paper by Stephen Richards and Gavin Jones seeks to examine longevity risk in all its guises and its implications for actuaries working in the private sector.
The full paper can be found at www.sias.org.uk/papers/longevity.pdf

According to the authors, longevity risk varies hugely according to the nature of the contract which contains it, sometimes in unexpected and surprising ways. Indeed, they argue that the greatest private-sector exposure to longevity risk is not to be found in the annuity portfolios of the quoted life assurance sector. Instead, they suggest that the shareholders of many industrial and service companies have much greater exposure to longevity risk through their defined benefit pension schemes.
The authors also contend that, despite the growing importance of longevity assumptions, the bases used in some corners are still very outdated.
Gavin began the meeting with a brief introduction of the paper, before opening the debate to the floor. The paper was widely praised by many speakers for being interesting and well written. One speaker talked of its ‘remarkable clarity’ in dealing with a wide range of different issues. Another praised its creative use of 3-D diagrams.
One topic in the paper that several speakers picked up on was the potential for the securitisation of longevity risk. It was argued that, in a world of market consistency, capital market solutions for longevity risk could set benchmarks for capital requirements. It was felt that ‘longevity bonds’ may well show that mortality is an expensive risk to hedge and this will generate further challenges for actuaries.
There was also some lively debate on the issue of compulsory annuitisation for pension schemes with fewer than 50 members. The authors are strongly in favour of this new legislation. Basing their argument on the results of a simple stochastic model of mortality risk, they write that ‘one could easily argue in favour of increasing this level’. Several speakers were strongly opposed to this view. They argued that small schemes may well be underfunded and compulsory annuity purchase could therefore penalise other active and deferred members.
One of the central arguments in the paper is the need for greater disclosure of longevity assumptions used to value pension scheme liabilities. One speaker suggested that some of the profession’s credibility was at stake in this area.
There was also some passionate defence of the annuity product. In responding to one question, Stephen described annuities as a being both an excellent form of insurance and an excellent investment product. Another speaker agreed that they provided good value, but felt that actuaries had been bad at communicating this fact.
The point was also made that actuaries have tended to focus on helping institutions to understand longevity risk, and there is much more we can do to help individuals do likewise.
To summarise, the paper attracted the strong turnout and good debate it deserved; the profession now has an excellent piece of work which will be much referred to in coming years and as usual one younger member went home happy with a bottle of Champagne for making the best contribution to the debate.