The Pension Protection Fund (PPF), which offers a safety net to members of insolvent pension schemes, says it will consider offloading its longevity exposure as part of a strategy to derisk its portfolio by 2030 - potentially giving an £80 billion boost to the nascent sector.
Speaking as the PPF unveiled the details of its long-term funding strategy, Martin Clarke, its London-based executive director of financial risk, says in addition to being completely interest rate, inflation and market risk-free in two decades' time, it also aims to immunise against longevity increases above its best estimates.
Clarke says at this stage the PPF is aiming for a 10% funding surplus to mitigate this potential event, but the emergence of the longevity derisking means a capital market solution is also a possibility. He cautions that given the PPF's size - its central assumption is that liabilities will total £80 billion by 2030 - it is too large for current market capacity, but if this increases a deal is possible.
"The longevity market is new and growing. Whether it will expand sufficiently and be competitive enough to accommodate schemes of our size at some point in the future is clearly a matter of conjecture, which is why we need to target a margin above our best estimate to pre-fund the capital to support the longevity risk.
"But if along the way, there is a good deal to be made then we would be interested in having transactions structured for us," says Clarke.
According to Clarke, the PPF is publishing its long-term funding strategy (LTFS) in order to demonstrate to pension funds that it is focusing on its long-term liabilities - a key point when the demographics of the defined benefit pension scheme sector means by 2030 there will be few, if any, schemes left to support it.
"The overall idea behind publishing the LTFS is to give visibility to some of the risks the PPF faces, and how we are targeting these. It shows we are committed to having the money to pay pensions in 2030," says Clarke.
Currently the PPF has a policy of immediately hedging out all its inflation and interest rate exposure using swaps. However, Clarke says that to cover both this and its - relatively small - market risk exposure, this will change to gilt focus over time.
"We are aiming to move into a run-off type strategy so that the risks can be avoided. We do not envisage being able to support even a small amount of investment risk by 2030. This is largely because by then we will have all our liabilities and won't want any exposure to downside risk - this probably involves us moving more into physicals for hedging purposes," he says.
The week in Risk.net, May 19-25 2017Receive this by email