Tryggvi Tryggvason, CIO of Icelandic pension fund Gildi, which has AUM of ISK205bn (€2.3bn)

“Increased longevity is a great thing in general but unfortunately it is not very good for a pension fund as it increases the scheme’s liabilities. It also affects our asset and liability ratio.

“We have to face these issues ourselves, as there has been no help from the government.

“Unless our fund’s performance covers the extra costs caused by longevity we only have three options to match the increase in liabilities: to cut the benefits, ask for higher contributions from our members or do both. But the finalisation of any contribution changes lies with the Confederation of Icelandic Employers and labour market negotiations.

“Regulations require the boards of all Icelandic pension funds to raise or cut benefits if the asset/liability ratio falls below 0.95, rises above 1.05 over five consecutive years, or if the asset/liability ratio is below 0.9 or above 1.1 over one year. We are now fully funded and assets are 6% more than liabilities. We are well prepared for any change in longevity calculations.

“Longevity also affects asset allocation by, for example, putting more emphasis on the asset and liability management and on longer-duration assets like index-linked bonds and less risky asset classes.

“I believe that Icelandic pension funds are all dealing with longevity in a similar way to us because we all work within the same framework and adhere to the same regulations.

“But Gildi has been a true trendsetter in the construction of new rules and procedures. In 2005, the creation of Gildi through the merger of two other pension funds gave us the occasion to review the 30-year old rules, procedures and benefits. This resulted in new articles of association and a new structure for the accumulation of pension funds, which decreases the implied imbalances imposed by demographic fluctuation. The accumulated pension obligations are to be balanced against the assets every year to ensure that the obligations are fully funded and that the benefit commitments at any time truly reflect demographic changes as well as risk factors.

“The merger also required members of the fund to choose between the old linear and a new age-related benefit system. The linear benefit formula, in which people earn the same benefit rights regardless of their age, still exists. But for a whole lifecycle the linear benefit system and the new system - whereby members earn more rights when young and less with age - will co-exist equally.

“We believe the new system is much more reasonable than the old. And longevity was one of the main reasons behind its development.”


Richard Kolarik, deputy chairman of Allianz Slovenska dss, which manages pension fund assets totalling SKK7.3bn (€202m)

“Longevity does not directly affect us. Of course, it affects the state-owned pay-as-you-go system, but currently it is not a problem for pension fund management companies because we have hardly any liabilities.

“We gather the assets into three pension funds, which are similar to open-end mutual funds, and invest the money according to Slovakian regulations. These say that our clients, the pension savers, cannot withdraw the invested money until their retirement. When they retire, they will withdraw their money from our fund and buy annuity from an insurance company.

“We will pay out the client’s money to the insurance company at market level and that will then provide the client with the pension. In the future, longevity may start to affect insurance companies but it’s uncertain because up-to-date no one has taken any kind of annuity or pension from insurance

“It will take another eight years to discover the effect, because the system just started two years ago and our clients have to stay with the system for at least 10 years.

“When we started our investments, our policies were very conservative because initially the system lacked sufficient money and experience. Now there’s a sufficient amount of money to diversify the assets
into riskier portfolios with more equity exposure. But the portfolio’s equities are not at the level the law allows because we are still conservative. Having followed the rally in the equity markets we don’t want to significantly increase our exposure at those peaks. The law allows investing up to 80% equities in a growth pension fund. However, the market average is only 15-16%.

“We think that our exposure to high-return instruments and equities will rise in the long term. Right now we are still developing these funds, gathering money and telling people about this product. Approximately 60% of the market’s clients have chosen a growth fund with an equity ceiling of 80%, which shows that they are keen to invest in high-return securities. The question is whether they are aware of the high risk that these high-return securities carry.

“By law, we are only allowed to invest in standard instruments such as money market bonds and equities, while hedging is solely allowed on currency risks, and derivatives are only for hedging purposes.

“In general, investment strategies in Slovakia - where there are only six pension fund management companies in the market - are very similar because all pension funds need to follow the market-average benchmark. If a pension fund underperforms the average, the pension management company has to pump cash in the fund to subsidise the yield of the fund at the market-average level.

“We have a different composition of bond portfolios and equities compared with other pension funds, but we are similar with regards to global weights in asset classes. For example, the exposure to equities of all growth pension funds is within a range of 13% to 19%, while the average is approximately 15%, so the deviation is not very significant.

“In the past we had, and still have, the highest exposure to bonds as we were the first to invest more in securities, but now competitors are increasing this exposure to our level. We have a very controlled risk-management policy as we want to protect the investment in our funds.”


Carsten Velten, chairman of the board of Telekom-Pensionsfonds (TPF), which has AUM totalling €160m, and head of pensions at Deutsche Telekom AG

“Currently, longevity isn’t a problem for TPF, although it may start to affect us in the next few years, because we don’t generate pensions ourselves; the period of pension payment is covered by an insurance company. In this way we transfer the risk of longevity from our fund via reinsurance to our partner. But, of course, the longevity risk influences the performance of insurance cover and consequently the benefits our customers receive: the longer people live, the smaller the employee’s pension benefits will be.

“Nevertheless, longevity does not pose a relevant source of risk for us at the moment due to continuous cover.

“TPF is mainly involved in deferred compensation, which in our system means contribution commitment with a defined minimum benefit. At the end of the saving phase we buy pension insurance cover.

“During the saving phase we invest in the European capital market, relying mainly on fixed income and shares. At the moment we do not use any special financial tools such as longevity bonds but we will keep an eye on the development of these relatively new tools. Nor do we use high-alpha investments as our pension fund volume of €160m is still too low for these types of investments.

“In addition to the old age pension, our employees can also choose to purchase cover against biometric risks - invalidity and death - during the saving phase. Here too, we transfer these risks via reinsurance to partners.

“It is difficult to judge what other pension funds do or whether they are similar to us because currently there are only a few pension funds in the German market. And the ones that do exist tend to have a different orientation. Some offer deferred compensation but the transfer of provisions for pensions has also become increasingly popular.

“The objectives of German pension funds extend over a wide variety of fields. Naturally, pension funds owned by insurance companies often work with continuous cover because their schemes have insurance company backing. Other funds generate pension benefits themselves.

“We were founded within the framework of the deferred compensation claim in response to the Pension Reform Act (Altersvermögensgesetz) in 2001 that established a Pensionfonds as a vehicle for pensions saving. Our foundation in 2002 meant that we were one of the earliest Pensionfonds in Germany.

“So, as TPF we stand out because we are one of less than a handful of company Pensionfonds in the German market.”