Delegates at September’s Longevity Seven conference in Frankfurt discussed the practicalities of a liquid longevity market and who might invest in it, should old age become an asset class.
Longevity and the risks posed by an ageing population have long been accepted as a risk to pension funds. But should funds consider buyouts or buy-ins, should they explore the possibility of a liability-driven investment portfolio, or should they wait until longevity becomes its own, tradable, asset class?
These were topics delegates were eager to see addressed, with one speaker proposing that exchange traded funds (ETFs) could soon bridge the gap prior to the creation of a fully liquid longevity market, while others proposed the use of longevity bonds, as this would allow them to reach an even wider audience.
In the discussion about potential investors in longevity were it to become an asset class, Jeff Mulholland, Société Générale’s head of insurance and pension solutions for the Americas, suggested sovereign wealth funds were ideal candidates. Emphasising that these were his own views, he said someone who was prepared to hold the position to maturity was the ideal longevity investor and that enterprising managers stood to profit in instances where investors could not manage investments in-house.
Discussing the practical potential investors, he said: “In addition to the insurance-linked securities investors who have been hypothesised, sovereign wealth investors also fall into this category. These are people prepared to hold positions to maturity. These are people that place a high value on the lack of correlation.”
The suggested list of investors omitted pension schemes, the largest holders of longevity risk worldwide - a fact that would have pleased Guy Coughlan, formerly co-head of JP Morgan’s European Pension Advisory.
Now head of asset-liability management at Pacific Global Advisors, Coughlan argued that schemes were “wholly incapable” of managing the longevity risk they were burdened with, which he estimated to be worth $25trn (€18.2trn) globally.
He outlined his use of the terms ‘hedger’ and ‘investor’, saying that the former implied an entity looking to dispose of its longevity risk, while the latter was willing to take on board this risk, earning a premium in the process.
“Pension plans and insurers can be on both sides,” he said. “Currently pension plans are investors in longevity because they hold it on their balance sheet, and similarly for insurers.”
He said that capital markets were needed as a source of addressing longevity, as insurers would not be able to cope with demand. “This will only work if the capital markets can do something that insurance companies can not. If you think about the capital markets’ channel for longevity risk transfer, it has to be complimentary to the insurance channel; it has to offer extra things - which we believe it does.”
He said several factors would attract investors to longevity; one was its high risk premium. “Secondly, longevity offers diversification - it has very low correlation with traditional asset classes,” he said, echoing Mulholland’s earlier point about why it would appeal to SWFs.
However, one “natural” holder of longevity risk that Coughlan highlighted was questioned by following speakers. He indicated that young workers in their defined contribution scheme could be interested in having exposure of their older counterparts’ risk of long life.
“Why young workers?” he explained. “Their own longevity risk is remote and won’t manifest itself for many years and gives you an opportunity for inter-generational risk-sharing from a public policy point of view.”
Klaus Mössle, head of Fidelity’s German institutional business did not think a 20-year-old worker should be burdened by hedging his generation’s age risk. Addressing Coughlan directly, he said: “You mentioned inter-generational solidarity - that made me a little bit nervous as someone from the buy-side. I think if they want to have solidarity, they should do it in their families, not with their DC plans.”
Ivan Zelenko, head of derivatives and structured finance at the World Bank - who had earlier presented on the use of longevity bonds in Chile - said he supported the fixed income route as the best way forward. He said it needed a strong collateralisation, potentially from a country’s treasury.
He also argued that ratings agencies needed to be involved to offer assessments of the risk, as well as dealers who valued the issuance.
“I will say that the bond is probably the simplest approach from the investment side,” he argued, with Mulholland seconding the notion.
Finally, the UK was praised for its role in raising awareness of longevity risk, with Amy Kessler, senior vice-president and head of longevity reinsurance at Prudential Retirement in the US, saying the UK was far ahead of her own in addressing the risks posed by old age.