(Bloomberg News) Goldman Sachs Group Inc., Deutsche Bank AG and JPMorgan Chase & Co., which bundled and sold billions of dollars of mortgage loans, now want to help investors bet on people's deaths.
Pension funds sitting on more than $23 trillion of assets are buying insurance against the risk their members live longer than expected. Banks are looking to earn fees from packaging that risk into bonds and other securities to sell to investors. The hard part: Finding buyers willing to take the other side of bets that may take 20 years or more to play out.
"Banks are increasingly looking to offer derivative solutions," said Nardeep Sangha, 43, chief executive officer of Abbey Life Assurance Co., a London-based Deutsche Bank unit that helps pension funds manage the risk of retirees living longer than expected. "Making the long maturity of the risks palatable for investors, including sovereign wealth funds, private-equity firms and specialist funds, is the challenge."
As insurers reach the limit of how much pension-fund liability they're willing to shoulder, companies such as JPMorgan and Prudential Plc last year set up a trade group aimed at establishing and standardizing a secondary market for so- called longevity risks. They're also developing indexes that measure mortality rates and securities to let pension funds pay fixed premiums to investors in return for coverage against major deviations from projections.
Swiss Reinsurance Co., the second-biggest reinsurer, sold the world's first longevity bond in December in what it called a "test case" to sell risk to the capital markets.
Goldman Sachs, based in New York, and Deutsche Bank in Frankfurt have set up insurance companies that promise to pay pensions if retirees live beyond a certain age. They typically receive a portion of the pension plan's assets in return. The banks, along with Morgan Stanley, Credit Suisse Group AG and UBS AG, are looking for ways to offer this risk to investors.
"Ultimately, reinsurance capacity for longevity risks will run dry, and that's why it's imperative that as the market grows and develops it is able to bring in new types of risk-takers," Sangha said. "The obvious channel is the capital markets."
Medical advances and healthier lifestyles have made predicting life spans more difficult for pension funds. Life expectancy in the U.K. is increasing by one to three months every year, according to Dutch insurer Aegon NV. Every year of additional life expectancy typically adds as much as 4% to future pension requirements, Aegon said in a report in March.
Aegon reported last week that first-quarter profit fell 12% as the company set aside money to cover the risk of policyholders in the Netherlands living longer than expected.
Pension funds can hedge against life-expectancy risk by transferring assets to an insurer or other counterparty that promises to pay some or all of the future liabilities. Last year, GlaxoSmithKline Plc, the U.K.'s biggest drugmaker, became the 10th FTSE 100 firm to buy insurance on about 900 million pounds ($1.5 billion), or 15%, of its U.K. obligations.
That means Prudential, the U.K.'s largest insurer, rather than the pension fund, will pay some GlaxoSmithKline pensioners should they live longer than expected. Most longevity risk transferred from pension funds is held by insurers.
Regulators are just beginning to focus on the new products.
"We're seeing more and more sophisticated mechanisms being offered," said Bill Galvin, CEO of the U.K.'s Pensions Regulator. "From a regulatory perspective, we are concerned to ensure that trustees understand the extent to which longevity risk has been passed from their scheme and the precise shape of any residual risk."