In many countries, the retirement system consists of three pillars: state pension, occupational pension and private pension. The risk of a higher life expectancy, therefore, creates challenges not only for the individual who needs an income for a period longer than expected after retirement, but also for the government, corporations offering occupational pensions, pension funds and life insurers who face retirement-related liabilities that increase as a result of improved life expectancy. This means that substantial longevity risks are held outside the insurance industry. Especially for corporations and pension funds this is potentially problematic as the future life expectancy is hard to determine and the uncertainty about future liabilities makes mergers and acquisitions difficult. In addition, corporations are frequently pressurised from shareholders to focus on their core business and not on pensions.
Longevity risk transfer
During the last years various solutions have been developed to transfer the longevity risk. The main solution available to pension schemes and insurance companies only wanting to transfer longevity risk, but no investment risk, is the regular premium annuity treaty. A regular premium annuity treaty is a reassurance structure which involves the client paying a pre-agreed fixed premium cash flow plus an additional fee to the reinsurer. The reinsurer in return pays the annuity payments for the remainder of the pensioners’ lives. Both payments are netted.