- 1.
6thMarch2009PensionFundRiskManagementNewPerspectivesonInvestment&Longevity
2. RisksFacingPensionsSchemes 3RiskAnalysis: Through theLenses
AssetLiabilityManagementAnalysis 4Introductiontolongevity
8LongevitySolutions 17Changing
DemographicsandChallengesforGenerationY
23NewPerspectivesonInvestment&LongevityContents2 3.
WhatisLongevityRisk?NewPerspectivesonInvestment&LongevityRisksFacingPensionsSchemesLiabilityRisksAssetRisksOtherSchemeRisksRiskInflationInterestRatesLongevity/MortalityEquityMarketRiskPropertyDurationMisMatchCreditCounterpartyReinvestmentLiquidityEmployerCovenantLegislationChangesAdditionalCostfromPPF3
4. NewDevelopmentsinALMRiskManagementLensTechnology
VaRprovidesasingleamount(thevalue)whichonemightexpecttolose(atrisk)inareasonableworstcasescenario,i.e.inoneyearstime.
Howwellequipped(ornot)aportfoliomaybetowithstandsuddenandseverejoltsorsustainedmarketdislocations.
Determineshowaportfoliorisesorfallswithrespecttomicroandmacrochangesinlongterminterestratesandlongterminflationexpectations.4
5. ExampleALMRiskManagementRiskTelescope5 6.
ExampleALMRiskManagementSensitivityMicroscope6ConvexityChart(Current)
ConvexityChart(100%Hedged) 7.
ExampleALMRiskManagementScenarioKaleidoscope7 8.
IntroductiontoLongevityTheBasics8 9. The risk that a specific
population will live longer than anticipated (Blake et al,
2006).Facts Lifeexpectancyisincreasing5hoursaday.
TheaveragelifeexpectancyusedbyFTSE100DBpensionschemesfora60yroldmanis15.5years.
ThePensionProtectionFund(PPF)slatestS143andS179valuationassumptionssetlifeexpectancyfora60yroldmanas16.8years.
Eachyearofextralifeaddsabout34%
topensionschemeliabilities.(TPR2006Norgrovespeech)Definition of
Longevity Risk05101520251920 1940 1960 1980
2000LifeExpectancyIncreaseinLifeExpectancy65yearoldinEngland&WalesMale
FemaleIntroductiontoLongevityTheBasics9 10.
Germanywasthefirstnationintheworldtoadoptanoldagesocialinsuranceprogramin1889,designedbyGermanysChancellor,OttovonBismarck.Why65?TheOriginsoftheRetirementAgeinSocialSecurityUK
Retirement Age Normal retirement age set at 65 in 1925 by the
ContributoryPensions Act. This Act established a pension of 50p a
week formanual workers and any others earning up to 250 a year. In
1925, the life expectancy at birth was 59
years.CallitSocialismorwhateveryoulike.Itisthesametome.
Bismarckduringthe1881debates The act was initially designed to
provide a pension annuity forworkers who reached the age of 70
years. Note that in 1889, theaverage life expectancy at birth of a
German citizen was 45 years. In 1916 (27 years later) the
retirement age was lowered to 65
years.Source:U.S.SocialSecurityAdministrationIntroductiontoLongevityFacts10
11.
Japan,Italy,USAPeoplelivelongerinthesethreeplacesthananywhereelseintheworld.5in1,700peoplearecentenariansSource:BBC900in1millionpeoplearecentenariansDiet
Genes
FaithIndividualslivebetween5and10yearslongerthanfellowcitizensIntroductiontoLongevityFacts11
12. WhatisLongevityRisk?Jeanne Louise Calmenton her 119th birthday.
JeanneLouiseCalmentistheoldestpersononrecord,livingfor122yearsand164days.(Feb.21,1875
Aug.4,1997)
Attheageof90,JeannesignedadealtosellherapartmenttoamannamedRaffray,thenaged47,whoagreedtopayamonthlysumuntilshedied(reversemortgage).
BigmistakebyRaffray.Jeane Calment
refusedtodieandhehadtomakemortgagepaymentsfor30years.
Henevermovedintotheapartment. Raffray
himselfdiedinDec1995,leavinghiswidowtocontinuethepaymentsfortwentymoremonths.
ThatisLongevityRisk.Source:TheNewYorkTimesIntroductiontoLongevityFacts12
13.
1917KingGeorgeVsendsthefirstcentenariantelegram.1952QueenElizabethIIsendsoutherfirsttelegram2000QueenMotherreceivestelegramfromherdaughterVS
In2007theAnniversariesOfficesentalmost5000birthdaycardstocentenarians.
Itisestimatedthatby2031therewillbe40,000peopleturning100yearsold.
2031
WilltheQueenbeissuingalettertoPrinceCharleswhenheis100yearsold?1977QueenElizabethIISilverJubilee.Morethan1000telegramsarebeingsenteveryyear203124
250+
1000+3600+40,000+IntroductiontoLongevityFactsWhatisLongevityRisk?13
14.
IntroductiontoLongevityDemographersViewsonLongevityDemographersViewsonLongevityCarbonDioxideLoladze
(2002)andObesityMizunoetal.(2004)Futurelifeexpectancymightlevelofforevendeclineduetolifestyleandenvironmentalfactors,suchasobesityandthedecreasedfoodderivedhealthbenefitsassociatedwithhigherlevelsofatmosphericCO2.IncreasingMortalityImmortalityEntropy
in Life Table S. Jay Olshansky et al. : (2001)Given the presence of
entropy in the life table, a life expectancy at birth of 100 years,
if itever occurs, is unlikely to arise until well past the time
when everyone alive today hasalready
died.SlowDowninObesityOlshansky
etal.(2005)Increaseinobesitywilllikelyslow,orevenreverse,increasesinlifeexpectancyintheUSGenetic
and Nongenetic Changes Vaupel et al. (1998)Nongenetic changes and
discovery of genes and other survival attributes
affectinglongevity, will lead to even longer
lives.BiomedicalDevelopmentAubreydeGreyThefirst1000yearoldisprobablyonly~10yearsyoungerthanthefirst150yearold14
15. Lifeexpectancydiffersbysocialclass.
Differenceinlifeexpectancycanbeaslargeas4.2 years
Thetrendsofimprovementaresimilar.
Butthegapbetweentopandbottomclassesarewideningthroughtime.
Shouldweanticipatea catchupinlifeexpectancyofunskilledmanual
infuture?LongevityBasisRisk
Example2:SocialClassesSource:ONSIntroductiontoLongevityTheBasics15
16. LongevityBasisRisk Example1:Region
Significantdifferenceinlifeexpectancybygeographicareas.
Thismaybepartiallyduetonaturalenvironment,climate.Also,itreflectsthedifferentmixofindustriesandoccupations.
Lifeexpectancyisreducing,ingeneral,fromsouthtonorth.Butcertainareasshowveryhighmortalityrate.e.g.CentralLondon.Source:DepartmentofHealthLongevityBasisRiskPeopleinasubpopulation,suchasapensionscheme,showingdifferentimprovementtrendsthanthereferencedpopulation.IntroductiontoLongevityTheBasics16
17. This material shows the type of analysis which Redington can
undertake to monitor a schemes assets and liabilities. You should
not rely uponany of the calculations or numbers shown in this
presentation as they are for illustration purposes
only.LongevitySolutions17 18.
InsurancebuyoutsTransferallpensionschemeriskstothebuyoutcompanyandallliabilitiesareremovedfromthesponsorsbalancesheet.NoninsurancebuyoutsBuyoutcompanyacquiresthecompanywithpensionschemetheyintendtobuy,andsellcorebusinessandkeepthepensionscheme.Insurancevs.NonInsuranceBuyoutsSolutionsBuyoutsAssets
Liabilities Solvency
FundingLevelRegulatoryBodyInsuranceBuyoutRestrictionsontheassetclassescanbeinvestedMeasuredatbroadlyriskfreeratewithbestestimateassumptions(Pillar2ICA)RiskcapitalupfrontNodeficitallowed,sofullyfundedatalltimesFSANonInsuranceBuyoutNorestrictionsontheassetclassesinvestedCanbuildinanticipatedinvestmentoutperformanceintodiscountfactorNosolvencycapitalCanhavedeficitsatagreedfundingtargetwithrecoveryplanTPR18
19. Forlongevityproductstosucceedtheymustbe: Attractivelypriced
Liquid Offeraneffectivehedgeagainsttheunderlyingrisk
Becomplementarytotheexistingassetmix
AvailableinsufficientquantitiestosatisfydemandItsabitlikeBetamax.Thereareearlyprototypesoutthere,buttheytendtobeexpensiveforwhattheyachievewedontyethavetheDVD."LongevityDerivatives:
Indexlinkedmortalityswaps Termandschemespecificmortalityswaps
Synthetic AnnuityoptionsSolutionsLongevityHedgingSolutions19 20.
LongevitySwapMechanics
Thegraphsshowexamplepayoutstructureoflongevityswap,wherethepensionfundpaystheexpectedbenefitpaymentforafixedperiodandthecounterpartywillpaytheactualbenefittotheschememembers.
InPVterms,thecommonfeatureoftheseproductsisthatthepensionfundpaysapremiumtothecounterpartyandtransferspartoralloftheriskinordertoavoidanyuncertaintiesforfuturebenefitpayment.SolutionsLongevitySwap20
21.
SchemeSpecificMortalitySwapPensionScheme1000permonthuntildeath1000permonthforaspecifiedtermtobesetbytheBank
Schemespecificwithzeroupfrontcost.
Inflationlinkedorstatic,dependingonthestructureofthescheme.
AllowsthesponsortoretainitsDBschemewhilstaccuratelyquantifyingassociatedlongevityrisk.
InreturnfortheschemepayingitspensionerbenefitstotheBankforaspecifiedtermtobesetbytheBank,theBankagreestopaybenefitstothemembersuntiltheirdeaths.SchemeMembersBankExample:The
diagram illustrates the payment flows under theswap for an
individual member of the scheme with1,000 pension per month. If the
member lives longer than the specifiedterm of the swap the pension
scheme benefits. If the member dies before the end of thespecified
term, the scheme continues to pay itsbenefits to the bank until the
agreed
termexpires.21AlternativeSolutionsSchemeSpecificMortalitySwap 22.
AlecHoldensHedge
Mr.AlecHoldenplacedabetof100forhimselftoliveolderthan100on10December1997whenhewas90yearsold.
ThebookmakerWilliamHillacceptedthebetandgavehimanoddsof250/1.
On24th
April2007,hecelebratedhis100thbirthdaywithachequefor25,000(taxfree)andabirthdaycardfromtheQueen.Thefirst1000yearoldisprobablyonly~10yearsyoungerthanthefirst150yearoldAubreydeGreyAlternativeSolutionsLongevityHedgingSolutions22
23. This material shows the type of analysis which Redington can
undertake to monitor a schemes assets and liabilities. You should
not rely uponany of the calculations or numbers shown in this
presentation as they are for illustration purposes
only.LongevityGenerationY23 24. WhoisWhatisGenerationY?LivingLonger
atWhatPrice?GenerationY24 25. Born19461961 Nowaged4762
Idealistic,careerorientated,consumerist Promotedyoungandpropped
Peakincomeearning19912005
Successionplanning,advisoryboards,nonexec.directors.Born19611976
Nowaged3247 Realists,cynical Heldbackbyoldfartlogjam
Peakincomeearning20062021
ResentfulofBoomerfocusonYsintheoffice;sandwichgen.
Mustdealwithbabyboomersinretirement.Born19761991 Nowaged1732
Experiential,ethicists,uncommittedtocareer,relationships
Helicopterkids;KIPPERS* Peakincomeearning20212036
Technologysavvy;globalthinking Inheritboomerwealth.
*KippersstandsforKidsInParentsPocketsErodingRetirementSavings.Source:KPMGGenerationaltraitsatworkandhomeBoomer
GenX GenYLivingLonger atWhatPrice?GenerationY25 26.
ChanginglifeexpectancycreatestheconceptofaworkinglifefollowedbyretirementGenY
WealthSource:UNStatisticsDivision;KPMGLivingLonger
atWhatPrice?GenerationY26 27.
Source:HMRevenueandCustomsStatistics,SurveyofPersonalIncomes2004/5;KPMGAverageannualincomeperpersonbysingleyearinUKLivingLonger
atWhatPrice?GenerationY27 28. Source:KPMG:GenerationY
beyondthebabyboomersIsRetirementa20thCenturyConcept?LifeExpectancyatbirth(years)Japan
81.9HongKong 81.5Switzerland 80.5Australia 80.2Sweden
80.1AJapanesechildbornin2005canexpect(ceterisparibus)alifespanof81.9years:78formenand85forwoman.Aslifeexpectancycontinuestoincrease,sotoodoesthedemandforafundedretirement.Apensionplandevelopedfromyouthandnurturedthroughoutmiddleagemustsupportalifestyleforupto20yearsbeyondretirement.Source:UNPopulationDatabase,2007LivingLonger
atWhatPrice?GenerationY28 29.
LifestyleTrendReshapedbyDemographicChangeTopfiveshiftinageatfirstmarriage(years)1980
2005 ChangeUnitedKingdom 22.9 29.5 6.6NewZealand 21.7 28.1
6.4Germany 23.2 29.6 6.4Australia 21.9 28.0 6.1France 23.0 29.1 6.1
First time marriages postponed average age in theUK is now
approaching 30. The postponement of marriage is matched in
manydeveloped countries by a scaling back in the number ofchildren
per couple. This has had a knock on effect on the transition
intothe types of financial responsibilities associated withasset
and family protection: Purchase and insurance of property Pension
plan (DB/DC).Source:KPMG:GenerationY
beyondthebabyboomersSource:UNPopulationDatabase,2007LivingLonger
atWhatPrice?GenerationY29 30.
Topfivefallinfertilityrate(numberofchildrenperwoman)1975
2005Singapore 2.6 1.4Italy 2.3 1.3NewZealand 2.8 2Japan 2.1
1.3Australia 2.5 1.8LifestyleTrendReshapedbyDemographicChange
Inthelatterdecadesofthe20th
centuryfertilityrateshavedeclinedinmostcountries.
AnexceptiontothisisintheUS,wherefertilityisontherisedueinparttothevaluesoftheLatinopopulation.
Womenandmenaremarryinglaterinlifeandhavingfewerchildren(inmostdevelopednations).Source:KPMG:GenerationY
beyondthebabyboomersSource:UNPopulationDatabase,2007
Thisshifthaschangedtheexperienceof20somethingyouthbetweentheboomerandGenY.
Theboomersrequiredcommitmenttosupportrelationshipsandhouseholds
GenYarefreedofthesecommitmentsintheiryouth.LivingLonger
atWhatPrice?GenerationY30 31.
IsRetirementa20thCenturyConcept?LivingLonger
atWhatPrice?ImplicationsofGenerationY31
LifeexpectancyintheUKexceeded65forthefirsttimein1946.
By2005thoseaged65inthatyearcouldexpecttoliveafurther18.7years.
Itwasassumedthatexpenditureinretirementwouldbelower.
Between1971and2000,theaverageageoffirstbirthsformarriedcouplesincreasedfrom24tonearly30.
Parentsarestillbereceivingcalls/textsfromtheirchildrenforaspare100forawindsurfingcoursewellintotheirsixties.
Theinvestmentimplicationsareonlynowstartingtosinkin.Source:
KPMGTheVoiceofGenerationY 32. IsRetirementa20thCenturyConcept?
Thegovernmentandprivatesectorcompaniesarethebiggestprovidersofpensions.Botharesteppingawayfromprovidingasafetynetforpensionersbecauseitisjusttooexpensive.
AccordingtotheOfficeforNationalStatistics,therehasbeenasustainedreductioninthepercentageofactiveemployeesthataremembersofDefinedBenefit(finalsalary)pensionschemesfrom34%in1997to19%by2005.Since2003therateofdeclinehasaccelerated.
Forthenextgenerations,generationXandgenerationY,however,thefinancialarithmeticofretirementhasundergoneahugechangeinonlyafewyears.LivingLonger
atWhatPrice?ImplicationsofGenerationY32Source:
KPMGTheVoiceofGenerationY 33.
Pensionpotrequiredfora65yearoldmaletosurvivetherestofhislife
However,thepensionpotrequiredtoprotectagainsttheriskisalmostthesame.
Theconventionalsolutionistobuyanannuity.Butifwetrytoquantifythecapitalrequiredwithinataxfreeportfoliotoallowanindividualtoretireat65withtheequivalenttoanindexlinkedpensionof100,000perannum,wegetalargenumber.
AssumingthatanaveragemalelifeexpectancyfollowsPMA92MediumCohortandcurrentmarketestimatesoffutureinflationandinterestrates,theamountofcapitalrequiredisapproximately2million.LivingLonger
atWhatPrice?ImplicationsofGenerationY33
LongevityisariskforbothDefinedBenefitandDefinedContributionplans.Theonlydifferenceisthatthepartybearingtheriskisnottheschemesponsor,butthepensionersthemselves.
34. IsRetirementa20thCenturyConcept?
Theimplicationsforinvestmentpolicyareclear:
Longtermplanningandaconcertedefforttosavewillberequiredinordertocreateareservecapableofgeneratingsufficientrevenuetomaintainlivingstandards.
Continuedinvestmentisneededforgrowthofcapitalandincomeformanyyearspastretirement.
Withtheincreaseinlongevity,thismeansthatriskshouldbereducedovera2030yearperiodandnotjustat65.
AnewapproachisneededwithrespecttoassetallocationbasedaroundLifeStyling.LivingLonger
atWhatPrice?ImplicationsofGenerationY34Fallingmarketshaveleftsomeinvestmentsindefinedcontributionschemesworthlessthanthecashcontributionsmadeintothem,PricewaterhouseCooperssays.ProfessionalPensions,4March2009
35.
Japanesechildrentaughtaboutpensionsandsavingforretirementfromanearlyage(11
18)
LessonsgivenbylocalmunicipalityofficialsunderPersonalHealthandSocialEducation(PHSE)
Sessionsnotlimitedtoschoolchildren
Allnationalsbetween2059arerequiredtoenrollinthenationalpensionplan.LivingLonger
atWhatPrice?EarlyYearsEducationItisnevertooyoungtostartlearning 36.
ContactsRobertGardner|Partner Direct:
+44(0)[email protected]|Partner
Direct:
+44(0)2072503415dawid@redingtonpartners.comRedingtonPartnersLLP1315MallowStreetLondonEC1Y8RDTelephone:
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