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.”
