The development of longevity as an asset class growing according to experts

UK leads the way in developing pension de-risking strategies

NEWARK, N.J.--()--The development of longevity as an asset class continues to grow as longevity risk becomes increasingly recognised, and as longevity markets provide investors with the opportunity to earn attractive returns, according to the findings of a recent international conference.

The seventh annual Longevity Risk and Capital Markets Solutions Conference1 held at Goethe Universíty in Frankfurt last week saw leading international industry and academic minds discuss the assessment of longevity risk, as well as the type of instruments needed by pension funds and insurance companies to hedge such risk.

Dr. David Blake, Professor of Pension Economics and Director of the Pensions Institute at Cass Business School, and chair of the conference, said: “Longevity risk is an increasingly important risk to recognise, quantify and manage for both pension plan and annuity providers, as well as for governments and individuals. Getting the right trend improvements in life expectancy is the key both to managing this risk and to creating an asset class acceptable to investors to buy into.

“However, this has proven to be difficult to realize in the past; even official agencies have systematically underestimated previous mortality improvements. Pension plan and annuity providers are beginning to question whether longevity is a risk they should be assuming on an unhedged basis, and the capital markets are beginning to offer solutions for managing and unloading longevity risk.”

*Pension providers, like Prudential, are positioned to help defined benefit plans manage longevity risk challenges and are working with key stakeholders to make changes and find solutions to keep pension schemes sustainable over the long term and help secure pensions.“

Amy Kessler, a retirement expert at Prudential Retirement, spoke of the UK’s leading role in pension plan de-risking: “Progress in the UK has been driven by regulation, accounting transparency and risk awareness among pension schemes that has led to dramatic changes in risk management and governance. Many of the same catalysts for change are arriving in the US today.“

“As US pension plan sponsors face these changes, there is broad recognition that their current risk position is unsustainable. While affordability remains an issue, techniques used in the UK for reducing and transferring risk have crossed the pond.“

“Pension buy-in transactions have just arrived in the US and longevity insurance will follow but demand will likely be modest until there is greater awareness of pension longevity risk in the US.”

Dr. Raimond Maurer, Professor of Investment and Pension Finance at Goethe University, and co-organizer of the conference, said: “In the twentieth century, state-organized pension programs shouldered the lion’s share of financial provision for the elderly. In the twenty-first century, however, retirees are likely to depend very heavily on privately organised funded old-age protection, such as private occupational pension plans and life annuities. Yet, the financial institutions that are supposed to supply these products, such as pension funds and life insurers, face substantial difficulties in managing systematic longevity risk. One possible solution to this problem might be the transfer of a reasonable proportion of this longevity risk to the capital markets. This, however, requires investors to accept longevity-linked instruments as an appealing asset class.”

Jeff Mulholland, Managing Director and Head of Insurance and Pension Solutions at Société Générale, who spoke at a special session on longevity as an asset class at the conference said: “The opportunity to relative trade the micro-longevity and macro-longevity markets is becoming compelling.

With spreads likely to tighten in the micro-longevity market due to market forces, investors will have the opportunity for potential mark-to-market gains over time, whilst the amount of longevity risk that needs to be hedged globally suggests macro-longevity spreads may widen over time, leading to opportunities for returns for investors who trade longevity.”

A full summary of the conference can be found at: http://www.longevity-risk.org/, or by contacting Professor David Blake: D.Blake@city.ac.uk.

The Pensions Institute at Cass Business School
The Pensions Institute conducts research and provides expert advice on all aspects of pensions. Established in 1996, it was the first academic research centre in Europe to focus exclusively on pensions. It is unique in bringing together internationally renowned experts from across many different disciplines - including economics, finance, insurance, actuarial science, accounting, corporate governance, law and regulation. This interdisciplinary approach enhances strategic thinking towards the development of new solutions to the complex pensions challenges facing states, corporate and individuals, and fosters research and knowledge sharing.

The Investment and Pension Finance Institute at Goethe Universíty Frankfurt
Goethe University, founded in 1914 by prominent Frankfurt citizens, is among the leading institutions of higher education in Europe. With more than 39,000 students in 170 degree programmes offered by 16 faculties, it is one of the largest German universities. The Institute for Investment, Portfolio Management and Pension Finance – directed by Prof. Raimond Maurer - was founded in 2000 and is part of the Finance Department at Goethe University Frankfurt. The institute’s primary activities concentrate on life-cycle portfolio choice for private households and the asset-liability management of institutional investors.

Conference Sponsors

BVI Bundesverband Investment und Asset Management e.V.
BVI Bundesverband Investment und Asset Management e.V. represents the interest of the German investment fund and asset management industry. Its 83 members currently manage EUR 1.8 trillion in assets, both in mutual funds and mandates. 123 so-called Informationsmitglieder, among them law firms, auditors, foreign fund companies, IT-firms, consultants etc. also use BVI as a reliable source of information. The main task of BVI is to promote the idea of investment funds and to safeguard the interests of its members. This includes supporting and providing advice for policymakers and regulators, supporting academic research on pensions and asset management, informing the general public about investment funds-related issues, as well as establishing and maintaining relations with other associations and business organisations, both nationally and internationally.

Commerzbank
Commerzbank Corporates & Markets (C&M) is the corporate and investment banking segment of Commerzbank AG, providing a broad range of products and services to corporate and institutional clients in Europe and beyond. The business incorporates advisory and capital markets activities in debt, equities, commodities, fixed income, currencies and alternative risk transfer solutions with a strong focus on derivatives and structured products. C&M aspires to be clients’ partner of choice when it comes to the development and execution of smart solutions for all their financing and capital market needs.

Deutsche Börse – Market Data & Analytics
Deutsche Börse – Market Data & Analytics provides high-value real-time market data, indices and back office services. Information from diverse sources, channelled and provided to its customers, tailored to their specific information needs. Accuracy and reliability are ensured by collecting the financial data from the Group’s own trading platforms, such as Xetra® and Eurex®, from the index provider STOXX Ltd and the systems of cooperation partners such as the Irish Stock Exchange and EEX. This unique market data pool is delivered in real time via the CEF® data feeds. Xpect®, Deutsche Börse – Market Data & Analytics’ data product, provides life expectancy data and indices on a regular basis. This type of data is known as generation tables and reflects a cohort view over complete population data.

Ernst & Young
Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Fidelity International
Fidelity International was established as a private company in 1969 and is now an active fund company in all significant financial markets. It manages fund assets amounting to €187 billion (as of 31/12/2010). More than 1,000 fund managers and analysts from Fidelity form one of the biggest teams of investment experts in the world (including resources of its sister company Fidelity Management and Research (FMR LLC)). With its research results and corporate analyses, it covers 95 percent of global market capitalization. Numerous awards acknowledge the high quality of the investment products and services offered by Fidelity to private and institutional investors.

Hannover Re
Hannover Re, with a gross premium of around EUR 11 billion, is the third-largest reinsurer in the world. It transacts all lines of non-life and life and health reinsurance. It maintains business relations with more than 5,000 insurance companies in about 150 countries. Its worldwide network consists of more than 100 subsidiaries, branch and representative offices on all five continents with a total staff of roughly 2,200. The rating agencies most relevant to the insurance industry have awarded Hannover Re very strong insurer financial strength ratings (Standard & Poor's AA- "Very Strong" and A.M. Best A "Excellent").

Pramerica’s Retirement division (“Pramerica”), a business of Prudential Financial, Inc., (NYSE: PRU), which is headquartered in the United States delivers retirement plan solutions for public, private, and non-profit organizations. Services include state-of-the-art record keeping, administrative services, investment management, comprehensive employee investment education and communications, and trustee services. With over 85 years of retirement experience, Pramerica helps meet the needs of over 3.6 million participants and annuitants. Pramerica has $220.7 billion in retirement account values as of June 30, 2011. Reinsurance contracts are issued by Pramerica ‘s Retirement Insurance and Annuity Company , Hartford, CT 05103. Pramerica ‘s Retirement Insurance and Annuity Company is not a U.K. Financial Services Authority (FSA) authorized insurer and does not conduct business in the United Kingdom or provide direct insurance to any individual or entity therein. Prudential Financial, Inc. of the United States is not affiliated in any manner with Prudential plc, a company incorporated in the United Kingdom.

1 Conference sponsors: BVI Bundesverband Investment und Asset Management e.V.; Commerzbank; Deutsche Börse – Market Data & Analytics; Ernst & Young; Fidelity International; Hannover Re

Contacts

Prudential
Dawn Kelly, 973-802-7134
dawn.kelly@prudential.com

Contacts

Prudential
Dawn Kelly, 973-802-7134
dawn.kelly@prudential.com