Understanding Pension Scheme De-risking (UK)

Behavioural science in longevity de-risking - In conjunction with Aon, behavioural insight agency Behave London carried out research in early 2019 to explore trustees’ understanding and views on longevity risk and the options available to reduce that risk. The research also canvassed opinion from legal advisers, insurers and administrators. Continue reading the whitepaper above to learn more. 


Risk settlement and longevity risk - why you need to be aware of it

No-one knows how long each individual will live.

In pension schemes, longevity risk is the risk that members live for longer than is currently expected. That results in pensions being paid for longer than expected, thus costing schemes more money.

Changes in life expectancy assumptions have been a major factor in fluctuating deficits in recent years. Recent mortality trends have been volatile, and subsequent pricing adjustments have generally moved in favour of schemes, but these could easily reverse, leaving schemes with another challenge.

Longevity risk could equate to as much as 15% to 20% of a scheme’s liabilities* over its lifetime. Among schemes that have taken action to reduce investment risks, the key remaining risk in the scheme is often longevity risk.

Schemes are increasingly taking action to manage longevity risk through risk settlement actions, with bulk annuity and longevity swap transactions covering over £25bn of trust-based pension scheme liabilities in 2018.

What stops schemes reducing longevity risk? 

Reducing longevity risk is not appropriate or possible for all schemes. For schemes where it may be feasible to de-risk but where action has yet to be taken, it may be that behavioural biases are getting in the way. Some examples of this are:

 

  • Trustees tend to stick with the status quo, when taking action may be the right thing to do.
  • Trustees may be prone to ‘regret aversion’ – this is where they wonder ‘what if pricing gets better in the future?’ or ‘what if life expectancies do not increase as we expect, and we would be better off not insuring the risk?’
  • Equally, trustees might find that the sponsoring employer will not choose to pay now, even though reducing risk is likely to save them money over the long term – because we all tend to concentrate more on the present than on the future.

Being aware of potential behavioural biases when considering risk reduction and making decisions allows trustees to be more comfortable in their choices. However, many schemes have not yet taken action, and with stakes so high we wanted to find out why.

How to reduce risk and identify behavioural bias

To help trustees navigate what can feel like confusing and jargon-filled waters, Aon has produced a simple guide.

Presented In four brief chapters, we set out the process for you, and show you how to proceed step by-step:

  • Chapter 1 Deciding your strategy – should you reduce or remove longevity risk?
  • Chapter 2 Engaging with the market to obtain pricing
  • Chapter 3 Selecting a provider
  • Chapter 4 Completing your transaction

Core research finding: It can be hard for trustees to navigate through all the decisions that need to be considered without getting stuck.

Throughout, we show you the behavioural biases that can trip up trustees and sponsoring employers, and help you move through these to make good, confident decisions about your scheme. Aon’s step-by-step practical guide removes the ambiguity from risk reduction and helps you decide what you need to do.

Interested in finding out more?
To receive our step-by-step guide direct to your inbox, please email: talktous@aon.com


* There is a 1 in 20 chance that future longevity experience will lead to a 15% - 20% increase in your liabilities over the lifetime of your scheme


About Aon
Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

© Aon plc 2019. All rights reserved.
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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