UK - Over a third of schemes have yet to be trained on longevity issues, even though longevity is seen as the second biggest risk to pension funds after investment, Aberdeen Asset management has revealed.

A Pensions Intelligence survey of 76 major UK pension schemes, with 2.9 million members and combined assets of £185bn (€219bn), highlighted increasing awareness of longevity as a factor in future funding levels, with almost 60% of the schemes predicting medical advances will continue to expand life expectancy.

Despite this optimism, the 'Living with Longevity' research - co-authored by Natalie Winter at Aberdeen Asset Management and Alistair Byrne of the University of Edinburgh Business School - revealed the majority of schemes continue to use short and medium cohort mortality assumptions, which "predict a dramatic slowdown in longevity improvements".

According to the research, only one scheme out of 76 is currently using a long cohort projection for its assumptions, yet the report pointed out "a pension fund using medium cohort could easily be underestimating its liability by 5% if the long cohort projection or better is borne out in practice".

In addition, the survey found only 39% of schemes had changed their mortality assumptions in the past year, despite hints from The Pensions Regulator (TPR) suggesting it prefers more "conservative" assumptions, while of this 39% less than 20% said they intend to make further changes in the coming year. 

That said, a further 46% have changed their assumptions in the past three years, and over half of these expect to make further changes in the next 12 months, but 8% of the respondents admitted they don't know when they will make changes.

Meanwhile, 64% of the participating schemes said they had received training on longevity issues, but of the remaining 36%, only 11% admitted it had planned trainings for the next year.

The findings showed 17% of schemes think trustees have good knowledge on longevity despite the lack of training, while 93% believe trustees have a "good" or "reasonable" level of knowledge about the issues.

Other findings from the research highlighted the most significant barriers to schemes managing longevity risk are complexity, cost and credit risks, as although the survey showed pension funds do not rate covenant risk as a key risk, it suggested "counterparty credit risk is deemed an active decision not to be taken in the market turmoil".

Schemes also appeared concerned about a "lack of suitable products, the credit risks created by dealing with an insurance counterparty, and in bond and derivative markets, and the costs of solutions", leading 59% to suggest longevity could be partially managed through a conventional growth strategy.

In particular, the report noted while derivatives are one possible way of managing longevity that is more attractive than a buyout - which 49% of respondents claimed is too expensive - "these are new instruments and for the most part active markets do not exist yet".

The report concluded: "While LDI is currently targeted at interest rate risk, the standardisation of longevity swaps, based on an industry accepted longevity index, supported by all participants in derivative trades, would allow asset managers to manage longevity risk overlays within a traditional LDI portfolio."

Byrne said: "While pension funds are very concerned about longevity risk, they seem a little optimistic about the mortality calculations they use, suggesting they are underestimating future liabilities. This is a cause for concern, particularly given the low take-up of solutions to manage longevity risk."

Winter added: "It is interesting that there is such a low take up of solutions to manage longevity risk, given it is a high concern. The market either needs to become more competitive or provide more appropriate solutions."

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