Longevity Risk

A survey of UK-based pension plan sponsors indicates that 40 percent expect longevity derivatives--such as longevity swaps--to play a strong role in mitigating longevity risk.

UK defined benefit pension plan sponsors are seeking solutions that will allow them to off-load the risk that their pension plan participants live longer than expected.

Annuities are complex, largely misunderstood, and often misrepresented in popular financial media.

The reality, though, is that these financial products are becoming an increasingly important part of the financial plans of millions of people around the world.  In fact, annuities are a vital component of the retirement planning process.

What is the probability that a given level of spending is realistic or “sustainable” throughout one’s retirement?

Stated differently, what is the likelihood that a given level of retirement spending is fraught with longevity risk and will result in financial ruin—with ruin defined as the depletion of assets during one's lifetime?

A responsible or sustainable level of retirement spending is a fundamental financial planning exercise and should serve as a starting point for considerations of whether and how one might use an annuity.

A longevity annuity is arguably the most efficient way to insure longevity risk. 

Consider the following example to see why this is the case:

Mark Hulbert is the author of the Hulbert Financial Digest, a popular monthly newsletter that tracks the investment performance of roughly 180 different investing-related newsletters.

Hulbert wrote an article on fixed annuities in the business section of the New York Times.

In a balanced and informative piece, Hulbert touches on topics that include the following:

Putnam Investments CEO Robert Reynolds spoke about the notion of "lifetime financial product allocation" at a recent industry conference.

Reynolds supports the notion of a range of products over the course of one's lifetime that include:

Researchers at the University of Toronto's school of medicine have developed a device that will enable rapid cancer screening.

The device--a microchip--could can detect certain biomarkers associated with cancer in a matter of minutes.

This technology would detect in minutes what now takes hours.

Researchers hope that the innovation will lead to more frequent cancer screenings and hopefully higher overall levels of early detection.

Source: Scientific American

The longevity gap refers to lower longevity rates in the United States relative to other developed countries.

Critics of the U.S. healthcare system point to the gap as a characteristic of the flawed health insurance system.

However, a recent New York Times article discusses the research of Samuel H. Preston and reveals some of the errors contained in the logic of critics of the U.S. health system.

Source: New York Times

Full Story

Warren Buffett does not need to think about an annuity.  While Buffett’s age may qualify him for annuity consideration, his wealth is sufficient to fund any personal income needs that may arise.  Also, concerns such as longevity risk and sequence of returns risk are non-issues for him.

The World Economic Forum--in partnership with Mercer and the OECD--delivered its findings from a two year study on the future of the pension and healthcare financing systems in ageing countries.

A Mercer article discussing the research can be found by clicking on the "full story" link at the bottom of this post.

Longevity risk and the role of private annuity markets are discussed, as are the potential longevity risk-mitigating effects of longevity-indexed bonds.

Source: Mercer