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Impact Investing

IPE special report May 2018

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Whisky and cigarettes

It was a good year for Wasserdicht Pension Funds. The 2010 return for our Dutch scheme was 7.9% and although we experienced a wobble in our coverage ratio over the summer, thanks to interest rates, we are now back in safe territory.

Longer term, longevity is proving to be a bit of a headache. As a big engineering company with a large blue collar workforce, we do not have the same issue as the funds for teachers or civil servants, who carry on living healthy lives well into their 80s, 90s and even to over 100, much more than they used to.

But making provision for recent increases in life expectancy for our Dutch scheme could cost us a few percentage points in coverage ratio.

And working out which of the mortality tables to use is difficult, since the Dutch Actuarial Society's figures are different from the ones the Central Statistics Bureau produces. Last time I asked Roger, our actuary, he told us to ‘suck it and see' for the time being. So much for actuarial science.

So when the head of pensions at a large investment bank called me from London earlier in the year, I arranged for him to come over to talk with us about some of his ideas on longevity hedging. At first, the meeting went well and it turned out that Bill and I had a few acquaintances in common, some of whom I have known from my days on the London fixed income desk of one of the Dutch banks back in the 1980s.

I have done my reading in advance, so I know my buy-ins from my buyouts and quite a bit about longevity hedging.

‘Look at all the mortality risk out there that's carried by the life insurers,' Bill says. ‘They are desperate to off load that - just look at the payouts they face in Japan right now.'
‘Right, and pensions are long-longevity,' I counter. ‘So all we need is you to act as intermediary?'

‘I think we can help.' Bill replies. ‘And imagine the professional kudos if you were the first pension fund in the Netherlands to execute a longevity swap!'

I ponder. ‘If there is all that mortality risk on life insurance books, wouldn't I be better dealing direct with a re-insurer and cut out the middle man?' I ask. ‘And tell me, how many longevity swap deals have you actually executed?'

Bill moves around on his chair with an uncomfortable look on his face. He says something about ‘broad expertise' in hedging and it being ‘early days' for the longevity market.

The following week is a meeting of our risk committee, where longevity has been placed at the end of a long agenda. The committee chairman starts on of his long monologues and my attention wanders. ‘Whisky and cigarettes!' I think to myself. If we just sent whisky and cigarettes to all our pensioners, we might help solve our longevity issue.

Pieter Mullen is investment director at Wasserdicht Pension Funds

 

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