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Swiss Re: Life Expectancy Blunder Can Create Pension Problems

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A new report warns of the harmful impact on pension plan liabilities that comes with underestimating life expectancy.

Swiss Re AG, Armonk, N.Y., addresses this issue in a report that examines what governments, pension plans, insurers and reinsurers can do to help address the challenges faced by societies as a result of increased life expectancy. The report also includes recommendations for key parties involved in addressing longevity funding issues.

The report observes that underestimating life expectancy by just one year can increase pension plan liabilities by up to 5%. A pension plan with $1 billion of liabilities would require an extra $50 million to be funded, notes Swiss Re, part of Swiss Reinsurance Company Ltd., Zurich.

Among the report’s recommendations:

–Employers and pension plan trustees should assess whether they are reserving for longevity at a suitable level and examine the feasibility of transferring some or all of the risk.

–The insurance industry should encourage the development of more refined risk models that recognize potential future longevity trends, especially in light of Solvency II (an updated regulatory requirement for insurance firms that operate in the European Union) and similar regulatory initiatives.

–Governments and regulators need to consider realigning retirement ages with life expectancy and apply consistent regulation and accountancy guidelines. Additionally, governments should look to public-private partnerships to address their own longevity exposure through defined-benefit schemes that are backed by the state.

–Governments should also support the development of a longevity capital market through the publication of reliable, consistent mortality data to allow the production of clear and strong indices. Annuity providers will need additional longevity capacity in the long term, and the capital markets may be able to provide some of this.

“While life expectancy is on the increase, the time required for implementing effective longevity funding solutions is running out,” says Christian Mumenthaler, Head of Life & Health Products and member of Swiss Re’s Group Management Board. “Insurers, governments and pension providers must act now to ensure that living longer remains a benefit to society, rather than a financial burden.”



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