U.K. pension plans should delay longevity swap transactions until pricing corrects, due to dislocations caused by mortality expectations, warns Aon Hewitt.
The pricing on longevity swaps is becoming dislocated, attributed to a 2-percentage-point drop in mortality improvement rates in the U.K.
“While there remains a strong appetite across the industry to manage pension risk, with a particular focus on tackling the uncertainty relating to life expectancy, there is now a potential price dislocation in the market,” said Martin Bird, senior partner and head of risk settlement at Aon Hewitt, in a news release.
Tim Gordon, partner and head of longevity in Aon Hewitt's risk settlement group, said in the release: “Mortality improvements have been much lower than expected over the past five years, averaging just 1% per year for males, compared with 3% per year in the first decade of this century”.
In the last decade, reinsurers used higher rates of longevity improvement to build pricing models.
Mr. Bird warned that pension funds could be in danger of transacting on poor terms if providers are using out-of-date assumptions to price their products.
