Survey results show a well-designed and effectively emphasized employer match is one of the strongest motivators towards plan participation, which can also aid in workforce management and retention. By deploying a range of risk management techniques to manage and mitigate risks, you are controlling your risk exposures in line with your risk limits. It may be also be prudent to review market, management method, and securitization products, as well as longevity risk, the pricing model of longevity risk derivatives, and optimal allocation design.
Using a model can provide a metric to quantify risk, which can then be used to derive estimates of expected returns on equity, accumulation risk, longevity risk, market risk, and more. Schemes can also be made more durable by building in a power to alter pension amounts earned in future (or to delay payment) if longevity changes.
Longevity risk is the risk of adverse changes in life expectancies resulting in a loss in value on longevity linked policies and transactions. The greater the level of volatility you allow into a portfolio and your life in retirement, the greater the exposure to sequencing risk and the greater the risk of capital loss, especially in risk-based investing. You should strive to align your risk-based approach with your investment goals and level of comfort with fluctuations in your account balance as a result of the market and other factors.
Formal policies define your approaches to risk management and the minimum control standards that should be applied in managing your significant risk exposures. Key aspects of an enterprise risk management approach include an astute navigation of the emerging structured finance market for longevity risk and a comprehensive understanding of tail risks.
Systematic longevity risk is a key risk factor in many life insurance and pension products, as no business can function without taking into consideration the internal and external risk factors. Risk can be adverse, but risk can also be positive when it turns opportunity into profit. Though it may seem strange to think of living long as a risk, it means running out of money too soon and a substandard retirement.
You do have other lifetime benefits that will satisfy your longevity risk, for example having a rational reason to expect your life expectancy to be much shorter than the general population, believing you can take the lump sum and purchase an even larger annuity benefit from a sound insurance company. Such instruments reduce the needed depth of risk research and therefore increase the control and efficiency-level of your organization. Usually, the hedge price the plan pays for the ceded risk determines the amount available for asset investments that in turn affects asset allocation.
Another barrier to effective use of insurance and risk reduction products like derivatives is the time required to analyze and purchase them. You can mitigate risk by having robust investment governance and monitoring procedures in place for your scheme.
Some risks, however, cannot be reduced through quantitative requirements as reflected in the technical provisions and funding requirements, and can only be properly addressed through governance requirements. Investigations of various risk mitigation strategies suggest that combination strategies, particularly those that include delayed retirement, identify all risks, including all hidden and embedded risks, as well as categorize, and evaluate potential sources if risk in products offered by both insurance organizations and other financial organizations.
Want to check how your Longevity risk Processes are performing? You don’t know what you don’t know. Find out with our Longevity risk Self Assessment Toolkit: