Longevity risk is the single most important consideration in post retirement, and the government should provide bonds to hedge against the trend risk, argues David Blake, director of the Pensions Institute.

Speaking on the pensions revolution in the UK to delegates at the 8th annual Post Retirement Conference in Sydney, Blake said that reforms a year ago, which removed compulsory annuitisation, had not led to the promised innovation of institutional annuitisation, as schemes were so scared about liability.

“We have the problem of no deferred annuities, we have the problem of distribution vehicles that are expensive and we have the problem we can’t hedge systemic longevity risk,” Blake says.

He argues most longevity is a trend risk, as life expectancy has increased by 2.5 years per decade and has done so for the past 150 years.

“That’s 15 minutes an hour. So in the last hour you’ve only spent 45 minutes listening to what’s been going on because you’ve had a free 15 minutes extra because your life expectancy has increased during that period.”

He added there only needed to be a very small incorrect estimate of that trend line before a company needed to hedge risk for the next 30 years, but the problem was that private organisations cannot hedge trend risks.

“I’ve been trying to argue governments should issue longevity bonds to hedge the trend risk and then the private sector is very good at hedging idiosyncratic risk.”

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As a result Blake argues hedging longevity risk becomes the single most important consideration, with interest rate and inflation risks coming in second. Investment considerations are only relevant for those with sufficient assets or who are genuinely risk tolerant.

“I use the analogy of a commercial airliner – the ascent stage is the accumulation stage of the airliner, and the descent stage is the decumulation stage. And getting a plane to take off is trivial compared with the problem of getting a plane to land safely, where you want it, when you want it. The same is true with decumulation products.”

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