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Swiss Re: retirement income products hinge on development of capital markets

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In order to continue offering guaranteed retirement income products on a large scale, such as annuities, insurers must encourage the development of capital markets in longevity risk, according to a new report.

Swiss re:, Armonk, N.Y., published this finding in its study, “A Mature Market: Building a Capital Market for Longevity Risk 2012.” The report concludes that a capital market for longevity risk could help address the challenges of funding longer lives.

The survey concludes that insurers can effectively address longevity risk by encouraging capital markets investors, particularly those engaged in the equity and bond markets, to invest in longevity instruments like annuities.

The report recommends that insurers and reinsurers work through industry bodies and with governments to design “efficient solutions” to encourage the development and expansion of capital markets. As regulatory regimes such as Solvency II add demand for longevity risk transfer, the report adds, encouraging interest from investors through education and awareness will be required.

The report estimates that each additional year of life expectancy raises pension liabilities by about 4-5%. Taking into account other costs to society, the report estimates that if individuals live just three years longer than expected, the cumulative costs of aging could increase by 50% of gross domestic product in advanced economics and 25% of GDP in developing economies.

Company pension plans, the report adds, are less able than in years past to meet employees’ retirement needs because of the low interest rate environment and poor investment returns. Thus, assets set aside to cover future pension payments are earning less investment return than expected.

The funding level—the ratio between existing assets and the expected retirement obligations—of the Global 500 companies’ pension funds is just below 76%. Upshot: the average pension scheme is underfunded by 24%

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