Longevity

What is longevity insurance?

One of the most difficult risks that pension schemes face is that of longevity, that is the risk of their members living longer than expected. The past few decades have seen substantial increases in life expectancy, which has caused pension liabilities to increase significantly.

Longevity insurance enables pension schemes to remove this risk and get certainty with regard to how long they will be paying pensions.

A longevity insurance contract fixes the length of time a pension fund will meet the pension payments to its members. If members live longer that the fixed period agreed in the insurance policy, then it is the insurance company that meets the extra cost.

Under a longevity insurance policy only longevity risk is insured. This means that there is no up-front premium payment and the pension fund retains all of its assets.

Consequences of underestimating longevity:

• Not just paying pensions for longer
• Increased interest rate risk - duration of the liabilities increased
• Increased inflation rate risk - unanticipated exposure to inflation in future years
• Increased (re)investment risk - assets may need to be reinvested for longer duration
• Increased sponsor/covenant risk - additional required contributions in the future might not be affordable or indeed possible

How does longevity insurance work?

• Pension scheme agrees to make payments the insurer as set out in a schedule
• This schedule reflects the expected payments to be made to the insured pensioners plus an insurance fee ("Fixed Leg")
• The insurer states the actual payments
• If pensioners live longer or shorter than assumed the insurer makes up or retains the difference in payments ("Variable Leg")
• This way, the pension scheme is protected against longevity risk 

How we work with your data

In setting mortality rates for a specific scheme, Pension Insurance Corporation (PIC) makes assumptions about both the current level of mortality and expected mortality rates. We consider the characteristics of the scheme membership (age, sex, year of birth, pension amount, occupation, region/postcode) which allows us to assign a general mortality rating to the membership. We then analyse the scheme's recent mortality experience to determine whether a further adjustment is justified. 

Any adjustment will take into account the size and hence statistical credibility that can be assigned to the scheme's experience. 

At that point PIC may be in a position to issue an insurance contract.