Information Matrix

The U.K. has been a hotbed of innovation when dealing with the longevity risk found in pension schemes.

Longevity trend risk is different from most other risks an insurer faces because the risk lies in the long-term trajectory taken by mortality rates. This trend unfolds over many years as an accumulation of small changes.

Annuities are a good example of the cornerstone of actuarial work: discounting future probabilities of payment to allow for the time value of money.  Low interest rates have had major consequences for savers looking for income in retirement, but they are also one reason behind renewed actuarial focus on longevity in recent years.

Last week we looked at the odd situation whereby longevity risk is regulated more strictly in an insurance-company annuity portfolio than in a company pension scheme.  One argument for the different treatment is that the sponsoring employer is a source of ongoing financial support for the scheme.

Casual readers could be forgiven for thinking that pensions and annuities have a lot in common, and that they should therefore be regulated in a similar manner.  After all, both annuity portfolios and pension schemes are exposed to a host of similar risks, such as increased longevity.

Solvency II is a major overhaul of the reserving rules for insurers throughout the European Union.  An important consideration for annuity writers is how it will relate to longevity trend risk.