Aon plc, a professional services firm specializing in risk, retirement and health solutions, reports that longevity risk is becoming an increasingly important concern as UK defined benefit (DB) pension schemes reassess their long-term objectives.
In recent years, enhanced funding levels have reshaped the landscape, bringing new opportunities and more complex decisions to trustees and sponsors.
As a result, many schemes are re-examining their risk management frameworks – whether they intend to operate on an interim basis pending an acquisition, or to continue operating long-term.
In this changing environment, managing longevity risk is becoming a key strategic priority. Aon expects longevity risk transfer activity to continue to gain momentum, supported by favorable pricing and a wider range of solutions in the global reinsurance market.
Matthew Fletcher, head of Aon’s population horizons team, commented: “Many schemes have benefited from significant improvements in funding levels, significantly reducing market risks such as inflation and interest rates, and are now reassessing their remaining risk exposures and how to optimize strategies. Whatever their objectives, longevity and wider population risks will increasingly dominate their thinking.
“These risks are real and significant – we recently saw liability values change by more than 2% over a year simply due to a recalibration of the Continuous Mortality Survey mortality prediction model.
Fletched continued: “Add to this the longer-term implications – medical developments, such as the expansion of GLP-1 drugs, or the increased use of artificial intelligence in healthcare, as well as other macro factors, such as changes in government spending on the National Health Service – and it is clear that these risks do have the potential to significantly impact the timetable for plans to achieve their ultimate objectives.”
Hannah Brinton, partner in Aon’s UK risk solutions team, added: “The good news is that the pricing to mitigate these risks is currently very attractive. The longevity risk hedging market – supported by the global reinsurance market’s appetite for UK longevity risk – is well established. What has changed in recent years is the pricing of this risk – it has fallen significantly, and wider schemes have been able to hedge current and future pensioners through longevity swaps.
“A number of factors have driven this attractive pricing, including a highly competitive reinsurance landscape and a higher interest rate environment. Reinsurance market appetite and structural simplification have contributed to wider scheme accessibility – longevity swaps are no longer the only domain of £1bn+ schemes.
“Importantly, hedging longevity risk is fully compatible with retaining the flexibility to purchase annuities at a later date – so it is suitable for both continuing and acquisition end-games. Taken together, these developments mean longevity risk management should be high on the agenda of trustees and sponsors.”