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How pension funds are addressing biometric risk

Pension funds are dealing with biometric risks in a number of different ways. A few of them explain their particular approaches .

ABP, Netherlands
“We fund our benefits 100% by ourselves. We are large enough to bear the risks,” says Alexander Paulis, chief actuary at the largest pension fund in Europe, with e190.7bn in assets under management. Because of its size, the number of people who die every year is not large in comparison to its membership. Like all Dutch funds, ABP provides life annuities, benefits for dependents and disabilities benefits. However, the fund has no catastrophe cover. “We have not thought about catastrophe risk, not on the benefits side. If, all of a sudden, our members were to die, well, that would actually make a profit for a pension fund.” Meaning that even though there would be payouts to be made, there would also be less funding to pay in.

PKA, Denmark
Pensionskassernes Administration has the third largest asset pool in Denmark, with e10.7bn. Because it manages eight separate pension funds of different sizes, there is no one size fits all solution. Its largest fund has 100,000 members, while the smallest has 2,000. “Each pension fund has its own reinsurance programme and on top of that we have a ‘catastrophe umbrella cover’ protecting all eight,” explains Tonny Anker Svendsen, chief risk officer. The fund has also been looking at ways to hedge its longevity risk, but says it is not committing to anything yet. “At the moment we are looking at protection, eg, in the form of mortality swaps which are closely related to the derivative market. We are also talking to reinsurance companies about whether they will be able to offer some kind of protection. There are products available but they are not common in the market at the moment.” PKA is a defined contribution scheme comprising mainly life annuities; however, death and disability benefits are also included.

PGGM, Netherlands
The e70bn Dutch healthcare sector fund, PGGM says it has already factored in longevity risk into funding. “For PGGM biometric risk is quite limited compared to the risk in equities and interest rates. We are a large population and have already assumed the improvement in mortality in our funding ratios,” says Niels Kortleve, manager of actuarial projects and special accounts. The fund says it is time to take longevity seriously. “By 2010 we make the assumption that there will be further improvements in mortality. We’ve compared this with sensible statistics in the Netherlands. They assume a rising trend in life expectancy.” But Kortleve also points out that people could have overestimated life insurance and life expectancy. A rise in obesity for example, may bring life expectancy down.

Construction Federation Operatives Federation Scheme, Ireland
The e540m CFOPS scheme is changing course, from a hybrid defined benefit scheme to hybrid defined contribution, explains administrator Pat Ferguson. But its death-in-service benefits are remaining the same. e63,500 is paid out for death in service, with e3,175 for each dependent child under 18. And if someone leaves work on health grounds, death in service benefits continue for another six months, which is a rare thing.
He also says that longevity risk is not a concern. “With our fund we use the longevity tables, but we also have 40 years of our own statistics. We don’t insure against catastrophe risk either. We know our industry reasonably well, and though it’s been discussed, we haven’t looked at it very seriously.”. He argues that with such a long history of statistics available for the fund, CFOPS does not want to pay for something that is too costly, and perhaps unnecessary.

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