A new series of longevity indices which aim to open up longevity swaps to a far larger number of pension schemes is being launched tomorrow by securities trader Deutsche Börse and Club Vita, part of the actuarial firm Hymans Robertson.
The Xpect-Club Vita Indices aim to offer UK pension schemes an index-based alternative which better reflect the scheme's risk profile when pursuing longevity swaps. The indices will track the different life expectancies of various types of pension scheme members.
According to the two companies, the approach gives schemes the advantages of an index-based trade, while also allowing them to customise the transaction to their member profiles.
Current longevity indices which display mortality of the average population mean schemes looking to pursue an index-based swap must address the basis risk that results from the gap between their specific risk profile and the longevity risk of the population.
This means most schemes that complete a longevity swap use the 'indemnity' method, which involves constructing the predicted longevity profile of a scheme based on its members.
But, according to Deutsche Börse and Club Vita, their new approach differs by offering schemes a range of longevity profiles for their members based on their gender and income, as well as cohort groups.
As a result, schemes can choose the index, or combination of indices, that best suit their member profile, in order to form a more accurate picture of expected longevity. The indices draw on Club Vita's analysis of five million pensioner records, covering men and women from over 140 UK schemes.
There were around £14bn worth of longevity swap deals completed for UK pension schemes last year, compared to £3bn the year before. With more deals expected this year, Stefan Sachsenweger, head of back office data and analytics at Deutsche Börse, said pension funds and insurance companies had to seek new ways to manage longevity risk.
'Longevity swaps is one such option and requires pension plans to have the right tools to accurately assess and offset these liabilities,' he said.
'The new Xpect-Club Vita Indices combine Deutsche Börse's data expertise with Club Vita's knowledge of pension scheme and longevity trends to provide these market participants with a targeted, customizable and objective approach to hedging against longevity risk.'
Andrew Gaches, longevity consultant at Club Vita, added: 'In the current climate, with companies still carrying large pension deficits and the prospect of poor investment returns facing them, de-risking can and should be an attractive option for many schemes.
'Longevity swaps are one de-risking option that schemes are increasingly pursuing, but up until now these have been the preserve of the largest schemes and have focused on their pensioner members only.'
The new indices would allow schemes of all sizes to explore whether longevity swaps are right for them, he said.
'Because the index tracks the longevity profile of multiple types of people, pension schemes can build up a much more accurate picture of their longevity profile than if they relied on existing, whole population indices.
'This is crucial, because higher socio-economic groups have seen 50% bigger rises in life spans than lower groups - a fact which population indices simply do not capture. Many more schemes will now be able to remove longevity risk, where appropriate, in relation to all their members,' he added.
The new indices will be published on Reuters and Bloomberg every third Friday of the month. They use a survivor-based approach where the index levels start at the same point and then deteriorate at different rates, depending on the longevity of the respective group