GLOBAL - Increases in life expectancy have been habitually underestimated in recent decades, and as such, pension schemes should adopt forward-looking models to better estimate future longevity risk, according to Swiss Re.
A new report by the reinsurer pointed out that projections produced by governments and professional bodies in recent decades have underestimated how long people will live.
The life expectancy of a UK male born in 2010 was estimated to be 71 years in 1977, but this estimate jumped to 77 years by 2000, Swiss Re said.
This gap has contributed to employer pension funds failing to account for longevity risk, which has led to additional and unexpected liabilities, the report said.
Daniel Ryan, head of research and development at Swiss RE, told IPE: "Most pension schemes have taken on board the need to address longevity later than insurers because of their broader investment strategy.
"However, pension funds being advised by actuaries are now looking at reinsurance and index solutions - including both indices based on their own experience and those based on population mortality - to transfer their risk."
But Ryan conceded that several issues remained with such solutions.
"While there are concerns over the financial strength of the counterparty under the different solutions, a particular concern for population indices is the basis risk, or rather the possibility that the future experience of the general population and the pension scheme will diverge," he said.
As a result, pension plan stakeholders, employers and pension plan managers who currently provide a guaranteed retirement income for their employees need to examine their options carefully, the report said.
According to Swiss Re, employers and pension plan managers need to assess their potential longevity exposure and decide whether it is best to retain it or pass some, or all, of it onto a third party that may be better placed to take on, and aggregate, the risk.
Such a third party should have made the appropriate investment - in terms of funding and resource - into an effective mortality model and hold the financial capacity to manage such a long-dated commitment.
Ryan also highlighted the value of pension schemes having access to different sources of data to help them better understand longevity risk and the benefits of protection.
He said pension sponsors and trustees had been more engaged in discussions around such data sources in recent years with their actuarial advisers and others.