A group of global financial regulators issued a report Thursday that aims to draw attention to growing longevity risks for pension plans in particular, and financial markets generally as plans look to lay off some of that risk.
The Joint Forum, which comprises global groups of banking, securities and insurance regulators, issued a report that examines the risk of paying out on pensions and annuities longer than anticipated amid aging populations and longer life spans. It reports that estimates of the total global amount of annuity- and pension-related longevity risk exposure ranges from US$15 trillion to US$25 trillion. And, it notes that pension funds are increasingly looking for ways to hedge or transfer this exposure.
The report aims to highlight the increasing importance of longevity risk, and makes recommendations for policymakers to help ensure effective supervision of related activities and risk. It says that while longevity risk transfer markets are not big enough to present immediate systemic concerns yet, “their massive potential size and growing interest from investment banks to mobilise this risk make it important to ensure that these markets are safe, both on a prudential and systemic level.”
Therefore, it recommends that regulators communicate and cooperate to avoid regulatory arbitrage; and, that they ensure that holders of longevity risk have the appropriate knowledge, skills, expertise and information to manage it. It also calls on policymakers to review their policies about where longevity risk should reside; that they should review rules regarding the measurement, management and disclosure of longevity risk, including capital requirements for expected and unexpected increases in life expectancy; and that they should consider ensuring that institutions taking on longevity risk are able to withstand increased life expectancies.
Policymakers should also closely monitor the risk transfer taking place between corporates, banks, (re)insurers and the financial markets, it says, including the amount and nature of the longevity risk transferred, and the interconnectedness this creates. “Supervisors should take into account that longevity swaps may expose the banking sector to longevity tail risk, possibly leading to risk transfer chain breakdowns,” it notes.
And, it says that policymakers should support the dissemination of more granular and up-to-date longevity and mortality data that are relevant for the valuations of pension and life insurance liabilities.
“By focusing today on the risks and issues related to emerging longevity risk transfer markets, the Joint Forum is helping global policymakers and supervisors remain ahead of the curve as these markets continue to grow,” said Thomas Schmitz-Lippert, chairman of the Joint Forum and executive director, international policy/affairs of BaFin, the German Federal Financial Supervisory Authority.