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Governments must 'kick-start' longevity risk market, says OECD

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  • Governments must 'kick-start' longevity risk market, says OECD

GLOBAL - Governments should "kick-start" the creation of a functional longevity risk market and consider issuing longevity indexed bonds, allowing pension funds to better manage the risks posed by ageing scheme members, the OECD has suggested.

Unveiling the first OECD Pensions Outlook - a 230-page report examining a variety of issues including pension reform during the financial crisis and the ideal construction of defined contribution (DC) plans - head of the private pensions unit Juan Yermo stressed that it was important to consider the design of not just the accumulation phase for DC schemes but also the payout phase.

He said the OECD saw the role of annuities in retirement as important, suggesting that annuitisation should potentially be by default - particularly in countries that legislated mandatory or automatic enrolment.

He also spoke out in favour of government intervention to create the necessary longevity market.

"The annuity market is unlikely to work unless there is strong backing from the government in kick-starting a risk-hedging market for longevity risk," he said.

A number of parties have attempted to develop a tradable longevity market, such as the Life & Longevity Markets Association, but consultants including Hymans Robertson have lamented the absence of usable indices.

In the report, the OECD went further in detailing how a government should intervene to best create a viable longevity market, saying governments and the associated statistics agencies could help construct "standard and reliable" longevity indices.

These would help with the "creation of standard longevity swaps (derivatives), making them more tradable", the report continued, saying this would in turn increase liquidity and encourage over-the-counter trading.

"Governments could additionally consider in certain contexts issuing longevity indexed bonds and issuing very long-term bonds in sufficient quantities," the report said.

It added that governments with a lower exposure to longevity risk - due to the nature of their social security system - could easily "kick start" any such market.

While it said sovereigns with an already high exposure to longevity risk could issue longevity indexed bonds, it suggested that "changes" to the way the country went about issuing its debt might be required.

"Alternatively," it concluded, "governments could issue very long-term bonds to help pension funds and annuity providers to hedge longevity risk."

Several countries have either considered or stepped up their issuance of longer-dated bonds, with the Swedish government recently announcing it would issue a limited number of 20-year bonds and the UK government mooting 100-year dated or perpetual bonds.
 

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