Industry funds risk losing a lucrative part of their membership base if they do not address the commercial threat posed by longevity risk, the head of Macquarie Funds Group’s new longevity solutions team has warned. Andrew Robertson, head of MFG Longevity Solutions and formerly founder of boutique consultancy Ingevity, said the over 50s demographic, which typically have higher account balances and are the most profitable of industry funds’ members, would be an obvious target for retail funds that manage to develop sophisticated longevity risk solutions for retirees. He believes super funds have a role to play in underwriting the longevity risk of their members by pooling that risk and offering guarantees backed by financial institutions, but face challenges in building solutions.

His team is evaluating both over-the-counter and exchange-traded solutions. “We see this as a significant opportunity and an asset class that may be of significant interest to long-term investors who want exposure to an asset class that is demonstrably non-correlated to the equity markets but offers a risk premium,” he said. The global financial crisis had forced funds to “think in a more fundamental sense” about why they are being paid a risk premium for the assets in which they invest, he said. In the case of longevity risk, uncertainty (such as whether or not doctors will develop a cure for cancer, and the impact of obesity), is driving the risk premium.

“Clearly these [risks] are more conceptually not linked to the underlying equity market performance than other asset classes that claim to be non-correlated,” Robertson said. Members of traditional allocated pensions, which have reasonably conservative asset allocations, have a 50 per cent chance of outliving their savings, according to Robertson. Australia is lagging other markets including the US and UK in providing longevity risk protection products. In the UK, Babcock International recently became the first UK firm to use a longevity swap to hedge against life expectancy risk in its pension scheme, using Credit Suisse as the counterparty.

Retirees in the US have access to variable annuity products which offer the flexibility of an account-based pension with retirees controlling the investment strategy and benefiting from investment outperformance, but charge a premium for a “guaranteed floor” on the assets, limiting downside risk. “This may well have relevance in the Australian market,” Robertson said. “We’re looking to build solutions at a wholesale level that enable super funds to focus on the day-to-day… and outsource the solution to the longevity risk problem. We have identified a number of specific initiatives in other markets and are looking to bring these to the Australian market and deliver them to Australian institutions.”