The trick is turning this risk into an attractive ‘product’ for investors. In order for this to happen it would need to be packaged into a standardised form, such as a bond, with a short maturity.
But therein lies the fundamental problem with longevity risk as an asset class. It is by nature long term and if investors only want the short end, who will take the tail risk?
“We are getting more interest in this but it’s still a strange asset class,” says David Blake, professor of pension economics and director of the Pensions Institute at Cass Business School. “People are familiar with commodities and are even familiar with cat risks, but I think the barrier is the maturity of the asset class; that’s the issue we haven’t quite resolved.”
Activity in this market has been scarce, but deals are being made. In 2012 the Pall (UK) Pension fund struck a world first when it hedged against the risk of its active members living longer than expected.
The global manufacturing firm’s UK scheme, which has assets of more than £120m and 1,800 members – entered into a £70m contract based on future values of JP Morgan’s LifeMetrics longevity index.
Previous longevity deals had focused on retired members only, but this deal broke new ground, as hedging against increased life expectancy of pension plan members who have yet to retire has been problematic due to the long-term nature of the risk and the difficulties associated with accurately hedging pension benefits that have yet to come into payment.
“It represents an important milestone for getting to a stage where UK pension scheme longevity risk is traded within the capital markets,” Hymans Robertson senior liability management specialist James Mullins said at the time.
“That position is increasingly looking like a real prospect within the medium term, with many capital providers showing strong interest in this risk given the massive demand from UK pension schemes to transfer their longevity risk to third parties.”
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