Automatic Adjustments to Longevity - Perspective of a Pension Fund

Transcription

1 This image cannot currently be displayed. Automatic Adjustments to Longevity - Perspective of a Pension Fund ICPM, Helsinki October, 2015

2 VOTE: Who is the natural bearer of longevity risk? A. Society B. Collective Pension Fund C.Private Insurance Company D.The Individual 1

3 Why are we discussing longevity? 2

4 Female life expectancy at birth Male life expectancy at birth Life expectancy Denmark Sweden Norway Finland Iceland Life expectancy Denmark Sweden Norway Finland Iceland Year Year 3

5 Why are we discussing longevity? We have at least 150 years of evidence that life-expectancy is increasing! My postulate (and suggestion for debate) This is a funding crisis not an unforseeable natural disaster and there is something to discuss! 4

6 Source: Asset Management: A Systematic Approach to Factor Investing, Andrew Ang (2014) 5

7 Pensions Schemes Have Matured Cash flows are negative Benefits exceed premia Stable investment returns are necessary to stabilize balance sheet Natural question (from young generations) Will there be money for us? Pressure On business model: Is it viable? From regulation: Isn t a pension fund a financial institution? 6

8 Crisis Accentuated by Regulatory Pressure What is the ( true ) value of a pension contract/promise Return assumptions Mortality assumptions Example: Solvency 2 adds 10 pct mark-up on capital requirement 25 pct. shock to mortality assumptions Discounting by risk-free rate (not expected return) 7

9 Danish FSA Longevity Benchmark Trend: Data for last 30 years from HMD ( ) Danish FSA computes industry-wide longevity benchmark since Males 2013 Males 2012 Males 2011 Mandatory use in computation of solvency Pension funds must explicitly document they deviate to use own models Females 2013 Females 2012 Females

10 Will automatic adjustment to longevity solve this? Not really Existing contracts are not easily altered Pension promise rescaled with reduction in expected retirement but it has some merit Individuals with insufficient savings will receive higher (rescaled) benefit and save for retirement for more years In reality we have seen massive risk-transfer Voluntary give-up of guarantees Allowing pension funds to revise benefits due altered longevity and return assumptions Tontine-like product designs where (sub-)groups share mortality risk (exclusive the pensionfund) 9

11 The Crux of The Matter Is Eventually, we all need to diversify (our own) death in the decumulation phase Best product: (Still the) Annuity Savings must be converted into an income stream to become a pension At payment? At retirement? At old age? In any case annuitisation is accompanied by longevity uncertainty (risk?) 10

12 ATP s Guaranteed Product Each year s guarantees are issued at Prevailing market rates Each year next year s contributions are hedged upfront From 2015: Market rates are guaranteed for 15 years on a rolling basis Current mortality forecasts Contributions / future pensions DKK Age DKK 20 year+ Over a lifetime this will generate high, stable returns High annual interest accrual Life-long annuity Contributions / future pensions Contributions Future pensions 11

13 Longevity Risk Revisited Is longevity risk really a risk? or the yardstick to distribute (collective) wealth among members Managing longevity requires modeling Incurring some model risk This is a collective risk It is better to be approximately right than precisely wrong. John Maynard Keynes 12