Although longevity impacts all defined benefit pension plans, its largest impact is on those plans that continually increase benefits after retirement. This includes many of the state and municipal plans. Other programs that may be negatively impacted by longevity extention are health insurance, long term care insurance, continuing care retirement communities (CCRC) and other programs. The purpose of longevity swaps is to provide certainty in the future benefits payable by the provider of these various schemes.
Because these investments are uncorrelated to economic based investments, longevity and mortality based investments provide additional diversity for investors, such as hedge funds, foundations, etc.
Mortality swaps are quite similar to YRT reinsurance and provide additional capacity for life insurers and they may be appropriate for certain offshore reinsurance. Currentlly, the primary insurance linked securities (ILS) in the United States provide catastrophic coverages for insurance and reinsurance carriers. However, many UK pension funds have mitigated their longevity issues using swaps and insurance.
Since US defined benefit pension plans have the same exposure to longevity as in the UK, US plans need to mitigate their longevity exposure. Although many of the pension plans already incorporate some mortality improvement in their liability calculations, for most plans the actual mortality improvement has continually been greater than expected which has resulted in greater pension liabilities than anticipated each year. Because of the inadequate funding of these plans over many years and decades, some providers are limiting future benefits for employees that have not yet retired in order to contain their future liabilities. However even these plans still understate their future liabilities.
Public plans have some of the most significant longevity issues.
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