Asset managers are gearing up to start trading in longevity risk, potentially opening the way for pension funds to begin hedging one of their biggest risks en masse. The involvement of specialist longevity and hedge funds offers a lifeline to a market that was in danger of being strangled at birth by a chronic lack of capacity.
The pension schemes of Babcock International and RSA Insurance have already signed deals with investment banks to protect against the risk of their scheme members living longer than expected, an eventuality that would increase their liabilities. Similar deals covering an estimated £20bn (€23bn, $33bn) of liabilities are in train, yet Watson Wyatt, the consultancy, has estimated that the current market capacity is just £10bn-£20bn because reinsurance companies – which are exposed to the risk of higher mortality via life assurance policies – are the only natural holders of longevity risk for the banks to pass the exposure on to.
A number of London and Geneva-based hedge funds specialising in insurance-linked securities (ILS) are also believed to be in talks with banks about entering the market for both UK and Dutch longevity derivatives.