(August 15, 2013) — The Bank of International Settlements (BIS) has issued a consultation document seeking views from investors and other market participants about how to make the longevity transfer market more secure and efficient.
“The ageing population phenomenon being observed in many countries poses serious social policy challenges,” the BIS said, adding that it also had a major financial impact on many.
The institution outlined proposals that it said would help to ensure the market for transferring this risk between parties with different interests was fair and safe.
1) Supervisors should communicate and cooperate on Longevity Risk Transfer (LRT) internationally and cross-sectorally in order to reduce the potential for regulatory arbitrage.
2) Supervisors should seek to ensure that holders of longevity risk under their supervision have the appropriate knowledge, skills, expertise, and information to manage it.
3) Policymakers should review their explicit and implicit policies with regards to where longevity risk should reside to inform their policy towards LRT markets. They should also be aware that social policies may have consequences on both longevity risk management practices and the functioning of LRT markets.
4) Policymakers should review rules and regulations pertaining to the measurement, management and disclosure of longevity risk with the objective of establishing or maintaining appropriately high qualitative and quantitative standards, including provisions and capital requirements for expected and unexpected increases in life expectancy.
5) Policymakers should consider ensuring that institutions taking on longevity risk, including pension fund sponsors, are able to withstand unexpected, as well as expected, increases in life expectancy.
6) Policymakers should closely monitor the LRT taking place between corporates, banks, (re)insurers, and the financial markets, including the amount and nature of the longevity risk transferred, and the interconnectedness this gives rise to.
7) Supervisors should take into account that longevity swaps may expose the banking sector to longevity tail risk, possibly leading to risk transfer chain breakdowns.
8) Policymakers should support and foster the compilation and dissemination of more granular and up-to-date longevity and mortality data that are relevant for the valuations of pension and life insurance liabilities.
Longevity swaps have taken off in major pension markets, but due to few banks and insurers wanting to take on that risk there has yet to be a major trading system created.
There was just one large longevity swap carried out in the UK in the second quarter of the year—the Bentley pension scheme’s £400 million transaction with Abbey Life. Today, Rothesay Life announced a bulk annuity deal that would see the aerospace company Cobham’s pension liabilities, including any potential increase in longevity, covered by the insurer.
The BIS consultation period closes on October 18. To access the consultation document, click here.
Related content: Canadian Pensions Face Longevity Hike & It’s the Demographics, Stupid!