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Impact Investing

IPE special report May 2018

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Longevity index spreads its wings

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Faced with ageing members and increasing liabilities, pension funds and other institutional investors are paying greater attention to the risk presented by longevity.

And in this environment, JPMorgan's LifeMetrics index - which claims to be the first international longevity index - is spreading into several countries.

As one of three components of the LifeMetrics platform, the index is designed to enable pension plans to measure and hedge the risk associated with the longevity of their beneficiaries. It incorporates historical and current statistics on mortality rates and life expectancy across genders, ages and nationalities, JPMorgan claims.

The index was first launched in the UK and the US in March 2007. This was followed by a launch in the Netherlands last October and in Germany in April this year.

"Our overall objective with LifeMetrics is to act as a catalyst to kick-start a traded market in longevity transfer," says Guy Coughlan, (pictured right) managing director and global head of LifeMetrics. "And we perceived significant opportunities in Germany. The country is well equipped to follow in the footsteps of the other countries, as it has a similar type of defined benefit pension plans as well as a large insurance sector, both of which would benefit from hedging longevity exposure. By launching LifeMetrics in the broadest set of countries, we maximise the chance for a traded longevity market to get off the ground."

But Coughlan admits that different countries represent different challenges. "The biggest difference is the way pension funds and insurers are regulated," he says. "The visibility of longevity as a risk also varies from country to country. In the UK, for example, longevity risk has a very high profile and is given plenty of attention by the Pensions Regulator, the Pension Protection Fund and the media. This means that managers, sponsors and trustees in the UK are receptive to exploring risk-transfer solutions. In other countries awareness is not as advanced, although with the rigorous risk management approach taken in countries such as Germany and the Netherlands it is natural to include longevity in the suite of risks that can affect the pension plan. Transactions are very similar between the countries. Investor interest was slightly more intense following our launch in the UK but we have already seen interest from some German clients."

The first public announcement of a transaction on the index in the UK - by the insurer and pensions buyout company Lucida - in early February helped boost the index, just as the availability of financial products based on the LifeMetrics index.

"There have been no other publicly announced transactions yet but we have been working on a number of transactions with pension funds and insurers in different countries, which are at various stages of completion," Coughlan says.

In general, pension funds and insurance companies, which through their portfolios of life insurance and annuities have the same exposures as pension funds, are the main users of the index.

"But we have also seen interest from investors across Europe that are looking to invest in assets linked to longevity risk," Coughlan adds. "It is a new asset class for them and presents an uncorrelated risk. The first movers in this market typically are investors in insurance-linked securities. However, some traditional hedge funds are also interested."

Since the first LifeMetrics launch last year, other banks have been trying to provide longevity indices. But these are based on specific groups of individuals rather than on national mortality statistics and are created for a different purpose, claims Coughlan. "Such indices cannot provide an effective longevity risk hedge for a pension plan, unless it is designed so that the group of people covered in the index is exactly the same as the actual population of pension plan members. It is also a very illiquid and costly way of providing a longevity hedge."

But he admits: "A hedge based on the LifeMetrics index will never be quite as effective as a hedge based on the actual members of the pension plan. However, for large enough plans, the difference in the risk can be minimised to a small level."

JPMorgan is also looking to launch the LifeMetrics index in other countries although no decision has been made yet.

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