Glaxo Transfer

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."

'Early Days'

The Frankfurt-based European Insurance & Occupational Pensions Authority isn't reviewing longevity transfers, said Sybille Reitz, a spokeswoman for the organization, because "the market is still in its early days."

The U.K. is the world's biggest market for insuring pension liabilities after a change in accounting rules in 2004 forced companies to include pension plans on their balance sheets, increasing the volatility of earnings. Since then, 30 billion pounds of liabilities have been insured, about 3% of the total outstanding, according to estimates by Hymans Robertson LLP., a London-based pension consultant.

Banks and insurers completed a record 8.2 billion pounds in longevity-risk transfers last year. Goldman Sachs-owned Rothesay Life Ltd. sold the most pension-plan insurance in 2010, while Deutsche Bank's Abbey Life completed the biggest swaps deal.

Longevity Risks

With $17 trillion of the $23 trillion in pension-fund assets worldwide exposed to longevity risks, according to Zurich-based Swiss Re, investment banks see this as an opportunity to create a new market for those willing to bet on life-expectancy rates. If pensioners die sooner than expected, investors profit. If they live longer, investors must compensate the pension fund for the additional costs it faces.

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