Longevity: How to Handle the Toxic Tail

Blake: government longevity bonds are the right solution for DB plans.

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story_images_watch_out_old_peopleBuyouts and buy-ins have been gaining attention in the defined benefit (DB) pension space as corporate pension plans grapple with ballooning liabilities and ongoing market volatility that, together, can badly punish company balance sheets. Such concerns culminated last year in the largest buy-out ever — in 2012 General Motors announced a transfer of up to $26 billion of pension obligations to the Prudential. This involved a partial pension buyout involving the purchase of a group annuity contract for GM’s salaried retirees.

But are insurance-based solutions a sustainable way for corporate pension plans to handle risk? According to David Blake, Director of the Pensions Institute at London’s Cass Business School, insurers will be unable to take the risk of insuring the $25 trillion of global corporate pension plan liabilities. As the opening keynote speaker at the 15th Annual Risk Management Conference in Muskoka Canada, Blake noted that insurers are already under pressure around the world particularly in Europe where some are even shuttering their businesses.

Blake raised this point during a presentation on longevity risk, a risk he believes many plan sponsors haven’t thought seriously about. It’s the top risk DB plans face and, as Blake quipped, “compared to the variability of life spans, equities look like a risk free asset” when it comes to pension balance sheets.

Blake is arguing for a government-backed longevity bond market where longevity risk is turned into an asset class. Plan sponsors could exchange fixed mortality for realized mortality over the term of a contract and, in doing so, hedge the risk of increasing life spans and the growing likelihood of “toxic tails” — those long-living and pensioned individuals whose life spans go beyond the mortality tables.

Read more about Blake’s proposal in this Q&A with Canadian Investment Review contributor, Scot Blythe.

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