Pension Buy-Out

Demand for longevity risk has been returning to the UK pension market. High levels of volatility during the financial crisis deterred many players in the pension buyout market. The return to normalcy in the capital markets may, in fact, be contributing to under-pricing of longevity risk among those who are providing solutions to UK pension plan sponsors who seek to offload longevity-related liabilities. A worthwhile article in the Financial Times discusses the range of options that are...

The United Kingdom has what is arguably the most sophisticated market in the world for financing longevity risk . The market for pension buyouts is developing and the demand among pension sponsors to off-load longevity risk is srtong. The issue is that there is a relative lack of capacity or ability to meet the demand. Reinsurers are active in the buyout market but the capacity is limited, and the longevity derivatives markets are relatively illiquid when compared to more established...

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. Use of derivatives to address longevity risk and other pension funding related issues serves as an alternative to other solutions such as a full pension...