UK – Actuaries have expressed scepticism about the potential for the longevity bonds market to take off.
There’s a “lack of enthusiasm for this developing too rapidly going forwards,” said Zurich Scudder Investment’s Malcolm Kemp as he summarised a meeting on the topic at the Institute of Actuaries last night.
There was “quite a degree of scepticism about whether this market would develop”.
The meeting was to discuss a paper on longevity bonds by David Blake, Andrew Cairns and Kevin Dowd, which concludes that such instruments could still be the next big thing for the financial markets once initial teething problems are overcome.
A so-called catastrophe bond from Swiss Re has taken off while the European Investment Bank/BNP Paribas longevity bond failed, the meeting was told.
“We can learn an important lesson, we hope, from these two instruments,” Professor Blake said. He cited design and other factors for the BNP Paribas issue, including ‘institutional issues’ whereby consultants were reluctant to recommend it to trustees and fund mangers had no mandate to manage longevity risk.
One of the speakers from the floor asked: “Who are the natural holders of longevity risk? What price am I paid to bear this risk? Is my balance sheet the place for this as opposed to a hedge fund?”
Another speaker advocated swaps, not bonds, as a more flexible way for pension funds to manage mortality risk. But BNP Paribas’ Denis Autier told the meeting that it was very easy to reverse the product into a swap.
Another speaker said the study amounted to “little more than re-arranging the lifeboats on the Titanic” – and that the crisis in pensions, caused by low yields and longevity, could be solved by higher interest rates.
“The actuarial profession needs to put the case for higher official interest rates,” he said.
Credit Suisse’s Nigel Knowles pointed out that schemes only buy assets that they like. “The key thing is to make an asset the people will want to buy in the first place.”