Pension funds welcome a new bond indexed to life expectancy which should cut the cost of matching a growing risk.
Deal: European Investment Bank's longevity bond
Size: £540 million
Structurer/manager: BNP Paribas
Date announced: November 8 2004 Asked what he thought about old age, Maurice Chevalier replied that he preferred it to the alternative. So do the rest of us. The EU expects the number of people aged 80 and over in its 15 pre-accession members to increase by nearly 50% in the next 15 years.
This raises the issue of how annuity providers can tackle longevity risk - the risk that people will live longer than expected. Life insurers are increasingly aware of longevity risk. “Someone who is 65 today will have a shorter life expectancy than someone who is 65 in 10 years' time and that's taken into account in pricing,” says Franck Pinette, head of life at global multi-line reinsurer PartnerRe.
If longevity trends are not accurately forecast, or are volatile, reserves and losses will have been wrongly estimated.
Similar problem
Pension funds face a similar problem. Annuities are paid for life. If funds are making payments to beneficiaries until those beneficiaries die, the longer people live the more money their fund has to pay them.