GLOBAL - Longevity risk transfers are set to become commonplace across the world's defined benefit (DB) pension market, Prudential Retirement has predicted.
Speaking at the Longevity Seven conference in Frankfurt yesterday, senior vice-president and head of longevity reinsurance Amy Kessler also praised the UK's role in promoting de-risking as a viable strategy for pension funds to undertake, noting that her home market - the US - had yet to embrace many of the longevity de-risking approaches commonplace in the UK.
Kessler, who recently oversaw the £100m (€113m) longevity reinsurance deal struck between Prudential and Rothesay Life, said UK corporates struggled with generous benefits in addition to cost-of-living adjustments - with schemes "in some cases" dwarfing their sponsoring company.
There have been several cases of this in recent times, most notably that of food manufacturer Uniq, which conducted a debt-for-equity swap with its underfunded scheme, being freed of its responsibility as scheme sponsor.
Kessler praised the UK for its part in longevity risk transfers, arguing regulatory changes such as strict funding regulations and a push for more transparency on company balance sheets was driving the interest in longevity risk.
"The UK has led the world in pension de-risking," she said. "I'll ask you to please keep your eye on this list because, if all of these factors are aligned, then any defined benefit pension market anywhere in the world will move toward managing and transferring risk."
She said the change would be driven by plan sponsors' changing risk tolerance, as well as stakeholders beginning to take note of risk as monitoring tools became more widespread.
She added that plan sponsors face "real financial consequences if they fail to act", with de-risking deals such as buy-ins and buyouts in the US only totalling £7.9bn between 2006 and 2010, while the UK market had seen £30bn in activity.
However, she attributed this to a lack of awareness of longevity risk in the US, with it ranking below interest rate and equity market risk for most of the country's plans, while its UK counterparts were more likely to be aware due to the role of auditors and consultants.
"One of the greatest distinctions when I moved to the UK to work with DB pension plans," Kessler said, referencing her time at Swiss Re, "was the distinct awareness from pension fund sponsors that auditors would be certain to enforce something that is broadly a mark-to-market concept on longevity."
She said this approach offered a "more realistic" estimate of longevity as it affected the plan than currently in place in other countries.