Longevity risk explained
In defined benefit 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.
Recent mortality trends have been volatile, and as a result future longevity expectations have proved increasingly difficult to predict. Trustees and sponsors have therefore started to explore new and innovative solutions for managing longevity and mortality risk, whatever the size of their scheme.
Longevity risk is likely to be one of the most significant risks for most schemes and has become increasingly important in assessing the overall risk profile of schemes as discount rates have fallen and liabilities have increased.
It is no surprise therefore, that schemes are increasingly taking action to manage longevity risk through risk settlement actions, with bulk annuity and longevity swap transactions covering over £55bn of trust-based pension scheme liabilities in 2020.