GLOBAL - Pension funds are "wholly incapable" of managing longevity risk, as are governments and the public sector, according to Pacific Global Advisors' head of asset-liability management.
Guy Coughlan, former co-head of JP Morgan's European pension advisory as well as global head of longevity solutions, also suggested that the most natural holders of longevity risk could be young employees saving for retirement through a defined contribution (DC) scheme.
Speaking at the Longevity Seven conference in Frankfurt last week, Coughlan began by saying that the current holders of longevity risk were "not the most efficient", arguing that any such risk should therefore be transferred away.
Coughlan cited several factors as driving forces behind longevity as a potential asset class, with market size being one, supporting estimates that global longevity risk in defined benefit schemes stood at around $25trn (€18.2trn).
He stressed the need to establish capital markets for longevity, as insurers would be unable to absorb the above capacity - therefore necessitating capital markets to develop risk transfers in a way that complements existing insurance approaches.
"Currently, most of the longevity risk in the world resides with institutions wholly incapable of being able to manage it - within governments, defined benefit pension plans, within corporations and the public sector," Coughlan said.
He argued that the longevity risk within insurance companies and capital markets was currently significantly smaller than those existing in pension funds, requiring a change in this imbalance.
"The natural holders of higher-edge longevity risk, one of them might be young workers in their defined contribution pension plans," Coughlan said.
He explained that younger workers had "remote" longevity risk, allowing for "intergenerational risk-sharing" from a public policy perspective.
"It provides them with a diversified investment, it provides them with a risk premium - certainly something I would have considered having in my own defined contribution portfolio," he said.
However, he conceded that numerous pension funds were choosing to accept their longevity risk as given at the moment, rather than transferring it out of the scheme.
"In doing so, they need to be aware this is part of their investment decision and should be factored in to what they do with areas such as asset allocation," he said.