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The OECD has called for greater standardisation and transparency in the pricing of longevity risk to allow for growth in the de-risking market.
Alongside the report, the body also published a detailed assessment of mortality assumptions and longevity risk, suggesting regulators should take a more proactive role in encouraging pension funds to manage their longevity. “More transparency and standardisation in the pricing of longevity instruments would aid potential investors in becoming comfortable with investing in longevity risk and allow for the further development of index-based instruments,” the report said.
It further urged pension investors to update their mortality assumptions regularly and ensure these recognised future mortality improvements, suggesting that failure to do so risked underestimating liabilities by 10%. “Likewise,” the report continued, “the use of assumptions that are not reflective of recent improvements in mortality can expose the pension plan or annuity provider to the need for a significant increase in reserves.”
One of the suggestions to better address longevity risk was for the regulatory framework to be risk-based, so that a pension plan’s actions to mitigate any risk would be incentivised. However, the report raised concerns about the “potentially limited” capacity of insurers and reinsurers to take on risk, instead proposing that capital markets offer solutions that allow longevity risk to be traded. It said such tradable solutions could offer a “promising alternative” for pension schemes unwilling to increase risk buffers to retain their longevity risk. But it said it would be vital that the market offer standarised products and be transparent, with the development of longevity indices key to such a step.
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Pensions Outlook 2014 full report