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ACKNOWLEDGMENTS
David Blake and Richard MacMinn are co-founders of the Longevity Risk and Capital Markets Solutions Conferences. They are extremely grateful to Angel Lin and her colleagues for their superb organization of the conference.
Longevity 14 took place in Amsterdam on September 20–21, 2018. Annals of Actuarial Science will publish a special issue of selected papers presented at this conference. Longevity 15 took place in Washington, DC, on September 12–13, 2019. Insurance: Mathematics and Economics will publish a special issue of selected papers presented at this conference.
Discussions on this article can be submitted until August 1, 2021. The authors reserve the right to reply to any discussion. Please see the Instructions for Authors found online at http://www.tandfonline.com/uaaj for submission instructions.
Notes
1 Blake et al. (Citation2013).
2 The conference proceedings for L2 were published in the December 2006 issue of the Journal of Risk and Insurance.
3 With a buy-out, an insurance company buys out the liabilities of a pension scheme, which is paid for with the pension scheme assets and a loan if the scheme is in deficit at the time. Both the pension scheme assets and liabilities are removed from the corporate sponsor’s balance sheet. Each member has a personal annuity from the insurer who takes over responsibility for paying the pensions. This contrasts with a buy-in, where the liabilities remain on the sponsor’s balance sheet, but the scheme buys a bulk purchase annuity (BPA) from an insurance company and pays members’ pensions from the annuity payments it receives from the insurer. The BPA is an asset of the scheme, not the members.
4 The conference proceedings for L3 were published in the fall 2008 issue of the Asia-Pacific Journal of Risk and Insurance.
5 In fact, Asia has the world’s largest and most rapidly growing aging population (United Nations Citation2007).
7 Life settlements are traded life policies. In April 2007, the Institutional Life Markets Association started in New York, as the dedicated institutional trade body for the life settlements industry.
8 In 2010, National Financial Partners became the sole owner of ILS/ILA.
9 Coughlan et al. (Citation2007).
10 We use PICA to refer to the United States-based insurer, which is a Prudential Financial Inc. company, as well as Prudential Retirement and Prudential Retirement Insurance and Annuity Company (PRIAC).
11 The conference proceedings for L4 were published in the February 2010 issue of Insurance: Mathematics and Economics.
12 The conference proceedings for L5 were published in the North American Actuarial Journal (volume 15, number 2, 2011).
13 www.llma.org
14 The conference proceedings for L6 were published in the October 2011 issue of Geneva Papers on Risk and Insurance—Issues and Practice.
15 A sovereign annuity, introduced by the 2011 Social Welfare and Pensions Act, is an annuity contract issued by insurance companies where the annual income payment is linked directly to payments under bonds issued by Ireland or any other European Union (EU) member state (known as reference bonds). The payments can be reduced if there is an event of nonperformance in relation to the bonds to which the annuity is referenced. This contrasts with a standard annuity, where the insurer guarantees to make the agreed payments for the lifetime of the annuitant.
17 The conference proceedings for L7 were published in the September 2013 issue of the Journal of Risk and Insurance.
18 In fact, the lump sum was only being offered to limited cohorts of plan members.
19 The conference proceedings for L8 were published in the North American Actuarial Journal (volume 18 (1), 2014).
20 Harrison and Blake (Citation2013).
21 Hunt and Blake (Citation2016).
22 The conference proceedings for L9 were published in Insurance: Mathematics and Economics (volume 63 (July), 2015).
24 Towers Watson (2015) Corporate Briefing, April.
25 The conference proceedings for L10 were published in the Journal of Risk and Insurance, volume 84, number S1, April 2017, 273–532.
26 Reported in Financial News, July 14, 2014.
27 Financial News, March 28–April 3, 2016.
28 Sun Life Financial uses the RMS Longevity Risk Model, which RMS describes as a “structural meta-model of geroscience advancement.”
29 Eckler Consultants (2017), Pension Risk Transfer Report, November.
31 The conference proceedings for L11 were published in Insurance: Mathematics and Economics 78 (2018), 157–380.
32 This is the regulatory authority for insurance companies in the United Kingdom.
33 Baxter (Citation2017).
35 LCP, Professional Pensions (December 15, 2016, and January 26, 2017). Since 2007, some 92 buy-ins have been completed.
37 The conference proceedings for L12 were published in the North American Actuarial Journal.
38 https://www.lcp.uk.com/media-centre/press-releases/2017/08/buy-in-and-buy-out-volumes-nearly-double; LCP (2018), Pension De-risking 2018.
39 http://www.artemis.bm/blog/2017/09/14/mmc-pension-offloads-huge-3-4bn-of-longevity-risk-to-reinsurers. The counter to this cost-effectiveness is that the hedger takes on additional counterparty risk. If a reinsurer fails then there is no insurer to protect MMC's pension scheme.
40 Reeve (Citation2017).
41 https://www.pensioncorporation.com/media/press-releases/Prudential, PIC Reach $1.2 Billion Longevity Reinsurance Agreement; L&G reinsures £600m of longevity risk through Prudential, Professional Pensions, December 21, 2017.
42 The role of the “commutation function” is to “compress” the risk period. As explained in Michaelson and Mulholland (2015, 32–33): “This is accomplished by basing the final index calculations on the combination of two elements: (i) the actual mortality experience, as published by the national statistical reporting agency, applied to the exposure defined for the risk period; and (ii) the present value of the remaining exposure at the end of the risk period calculated using a ‘re-parameterized’ longevity model that takes into account the realized mortality experience over the life of the transaction.”
45 Professional Pensions (2016), Risk Reduction and the Extent of Trust in Pension Scheme Advisers and Providers, June, p. 26.
46 Godfrey (Citation2017).
47 Legal & General and Engaged Investor (2016) De-risking Journeys of Mid-sized Pension Schemes, June.
48 An example of this was the Philips Pension Fund, which in 2015 completed a full buy-out valued at £2.4 billion with PIC. The longevity risk was simultaneously reinsured with Hannover Re. Another interesting feature of this deal was that it covered both retired and deferred members.
49 Angus Peters (2018), Insurers compete with fund managers for lucrative pension pots, FTfm, 15 January. The article points out that “insurers and asset managers are engaged in a turf war for the £1.6tn sitting in the UK’s defined benefit schemes.”
50 Michael Klimes (2017), How the first automated bulk scheme transfers happened, Professional Pensions, November 10.
51 James Phillips (2017), DB schemes insuring wrong tranche of members in buy-ins, Professional Pensions, August 14.
52 Stephanie Baxter (Citation2017), Converting longevity swaps into bulk annuities: The next de-risking innovation?, Professional Pensions, April 13.
53 Murphy (Citation2017). Provided due diligence has been carried out at the outset, subsequent data errors tend to be unbiased in terms of their impact and so average out close to zero.
54 That is 4.9 million members (The Pension Regulator and the Pension Protection Fund, Purple Book 2015).
55 For example, lump sum commutation, trivial commutation, early/late retirement, increasing a partner’s benefits at the expense of the member’s benefits, and pension increase exchanges.
56 Valuation and risk assessment of a deferred annuity can be broken down into five overlapping components: survival to retirement; the socioeconomic group of the pensioner at the date of retirement; the base mortality table at the time of retirement for that socioeconomic group; general mortality improvements (e.g., age 65+) up to the date of retirement; and the mortality improvement rate after retirement. Uncertainty in the probability of survival to retirement will typically be quite small in relation to the other risks.
57 Murphy (Citation2017).
58 Martyn Phillips, Mercer (quoted in Professional Pensions (2016), Risk Reduction and the Extent of Trust in Pension Scheme Advisers and Providers, June, p. 28). Hannover Re had previously warned about this: “The number of risk-takers is limited and there is no unlimited capacity in the market for taking on longevity risk. The increasing worldwide demand for longevity cover will challenge the capacity for securing longevity risk” (quoted in Punter Southall (2015), De-risking Bulletin, March). At the time of writing, there were significant human resource bottlenecks in some parts of the transaction chain, in particular, a shortage of qualified lawyers.
59 The proposal was announced by the U.K. finance minister (George Osborne) in his budget speech on April 19, 2014.
61 Josephine Cumbo (2017), Pensioners hit as annuity rates drop 10% in two years, Financial Times, 1 September.
62 Source: Hargreaves Lansdown, August 2017.
63 Seekings (Citation2018). There were similar findings in a study by the Institute for Fiscal Studies; see Phillips (Citation2018a).
64 Athene is majority owned by private equity company Apollo Global Management, LLC.
65 Navigating you through your de-risking journey: Overseas, Aon Risk Settlement Market Review 2018.
66 Phillips (Citation2018b).
67 Since 2011, PICA has completed more than £32 billion in international reinsurance deals, including the £16 billion deal with the BT Pension Scheme in 2014.
68 In August 2019, the High Court in London blocked the Prudential-Rothesay transfer on the grounds that Rothesay was a “relatively new entrant without an established reputation in the business” and although it had solvency ratios at least equal to Prudential’s, “it does not have the same capital management policies or the backing of a large group with the resources and a reputational imperative to support a company that carries its business name if the need were to arise over the lifetime of the annuity policies” (Susanna Rust (2019) High Court blocks £12bn Prudential-Rothesay annuities transfer, IPE, 19 August).
69 Club Vita is a longevity data analytics company that pools data from over 220 U.K. DB schemes covering 2.8 million pensioners, approximately on-quarter of the total. RiskFirst is a fintech company that launched the PFaroe software in 2009 to enable pension funds to manage their asset and liability risks.
70 This brought the total value of all the deals between the two companies to £4.4 billion.
71 Zurich reinsured a significant proportion of the longevity risk with Canada Life Re. It has executed £3.5 billion in longevity risk transfer deals since it entered the market in 2016.
72 This brought the total value of the deals between the two companies to £2.2 billion.
73 This is discussed later.
74 Attractive pricing opportunities for buy-in/buy-out, XPS Pensions, Briefing Note No. 2, June 2018.
75 That is, specific individual cash flows that give rise to the greatest uncertainty in value terms.
76 Athene & Apollo get long-term capital in $19bn annuity reinsurance deal, by Artemis on December 21, 2017; http://www.artemis.bm/blog/2017/12/21/athene-apollo-get-long-term-capital-in-19bn-annuity-reinsurance-deal.
77 Evans (Citation2018).
78 PGGM’s $400m Leo Re is a private sidecar deal with Munich Re, by Artemis on February 5, 2018; http://www.artemis.bm/blog/2018/01/02/pggm-secures-140m-leo-re-sidecar-tranche-takes-2018-issue-to-400m.
79 Guernsey targets “true convergence” via all in one ILS structure, by Artemis on July 24, 2018; http://www.artemis.bm/blog/2018/07/24/guernsey-targets-true-convergence-via-all-in-one-ils-structure.
80 The mortality term structure is the two-dimensional surface showing projected mortality rates at different ages for different future years.
81 The market for micro-longevity risk trades assets involving a small number of lives. In the case of life settlements, for example, the products involve individual lives and hence are subject to a significant degree of idiosyncratic mortality risk. This contrasts with the market for macro-longevity risk which deals with pension plans and annuity books and hence involves a large number of lives: here idiosyncratic mortality risk is much less important than systematic mortality risk which is essentially the trend risk of getting life expectancy projections wrong.
82 In August 2017, Goldman Sachs sold its remaining stake in Rothesay Life to a consortium comprising US buy-out firm Blackstone, Singapore’s sovereign wealth fund GIC, and US life insurer MassMutual in a deal valuing Rothesay Life at around £2bn; http://www.cityam.com/269996/goldman-sachs-sells-final-stake-2bn-rothesay-life.
83 Anthony Hilton (2016) Life line, Pensions World, May; Accounting for Pensions: Reflecting the cost of pension freedoms and life expectancy, Xafinity Punter Southall, April 2018. See also www.bbc.com/news/health-4060825.
84 Stephanie Baxter (2018) “Healthy” life expectancy falls for women, but improves for men, Professional Adviser, 13 December.
85 Victoria Ticha (2018) Latest CMI model reveals clear trend in life expectancy, Professional Pensions, 1 March.
86 XPS Pensions (2019), New “SAPS3” mortality tables—a confusing message?, Briefing Note No. 3, January.
87 Sturgis (Citation2018).
88 Life expectancy gap between rich and poor widens, BBC News, February 15, 2018.