UK - Pension Corporation has launched longevity insurance for defined benefit (DB) schemes, which will last until the last pensioner or their dependent is deceased and could improve future buyout costs.

The firm, which also operates in the buyout market, said the insurance product would be provided by its subsidiary Pension Insurance Corporation (PIC) and has been launched in response to the growing recognition of longevity as a significant risk to pension funds.

John Fitzpatrick, director of PIC, said "a lot of time has been spent covering asset risk" but not as much on longevity risk.

However, he said it was clear from a recent consultation paper by The Pensions Regulator (TPR) and "other commentators" in the industry "this risk is a significant risk for pension funds so the timing of it [the insurance] is to address a subject which has been overlooked".

He said the product - which is an insurance policy and not a derivative - was the result of "many conversations with pension plans" who wanted a product that was insurance-based, specific to the longevity of their pension plan and which lasted for more than 10 years.

As a result, PIC claimed the insurance it is offering is "substantially superior" to other products as it also extends until the last pensioner or their dependant dies, with the PIC policy reimbursing funds for any future pension payments which arise if pensioners live longer than expected.

However, as the policy could last for at least 50-60 years Fitzpatrick pointed out if in that time the pension fund wanted to buy-out their liabilities or if the scheme went into wind-up and passed into the hands of the Pension Protection Fund (PPF), the insurance policy would be treated like any other asset of the scheme.

Fitzpatrick said: "If they decide to buy out, this insurance policy is an asset life and inflation or interest swap, so it could be sold to the buyout provider and it would, we believe, improve the price of a buy-out as the risk of longevity has been fixed for their pensioners."

PIC highlighted current increases in life expectancy means a 65-year-old British men can expect to live 4.5 years longer than in 1980, while women's longevity has increased by 3.2 years.

However, the trend is accelerating with male life expectancy increasing by one year every five years, and it is currently estimated that a one-year improvement increases the liabilities of the average fund by more than 3.5%, as pensioners draw their benefits for longer.

That said, PIC highlighted the insurance policy is paid for by fixed annual premiums, which are tailored to the specific longevity risk of the pension fund rather than on an index based on the longevity of the population as a whole.

Although Fitzpatrick confirmed as the policy lasts for such a long-time once there are only a few pensioners left, such as in the 50th year, the fixed annual premiums could be replaced by a final payment to improve efficiency and reduce administration costs for both the provider and the scheme,

In addition, because the policy is paid for by annual premiums, PIC pointed out that 100% of the scheme's assets can remain invested which could be a necessary requirement for those pension schemes who want to improve their funding position.

As a result, PIC stated the product would particularly appeal to large pension funds that have no plans for buyouts, or those that plan to buyout in the future and want to keep their assets within the scheme.

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