PensionsFirst aims to trade pension fund longevity risk

A new London-based firm, PensionsFirst, has announced it is trying to create bonds and derivatives to address the longevity and market volatility risks of UK defined benefit pension schemes.

Many of these pension schemes are struggling to make up deficits under the stringent FRS 17 accounting rules. The rules require funds to discount their liabilities using bond yields and to use market prices for valuing assets, reporting any deficits on their balance sheet.

“We will create bonds and derivatives that are pension scheme-specific and precisely match their liabilities,” said Timothy Lyons, a founding partner at the firm.

PensionsFirst plans to offer bonds to defined benefit pension funds that either selectively or comprehensively manage their longevity and market volatility risks. Lyons suggested the aim was to plug the gap between bulk annuity buyouts and the liability-driven investment solutions offered by banks.

The idea of directly trading longevity has been mooted for some time, particularly as a panacea for pension schemes with large deficits. PensionsFirst has been working on a new method to assess and value this risk over the past two years, which it is now trying to patent. Having taken on longevity exposure from beleaguered funds, the firm will seek to place it with investors through capital notes. It is setting up an international distribution network for its products, according to a statement.

Lyons said that using short-term funding would help investors gradually become more comfortable with the underlying risk. “We’re confident we can generate strong interest in this asset class,” he remarked.

Generating this interest from investors is seen as one of the major obstacles to getting a market in longevity off the ground. Another is basis risk, a problem that was blamed by some for the failure of a longevity bond issue marketed by BNP Paribas in 2004. Targeted at holders of longevity-linked liabilities, including pension funds, the 25-year £540 million bond was to be issued on behalf of the supranational European Investment Bank. It had a coupon linked to the survivorship of 65-year-old males in England and Wales, but pension schemes are understood to have been concerned about the mismatch between the demographic scope of the bond and the exact requirements of their portfolios.

Lyons said PensionsFirst would take responsibility for managing the basis risk between the bonds sold to pension funds and any capital notes placed with investors.

The new company is chaired by Amelia Fawcett, former chief operating officer of Morgan Stanley’s European operations.

Previously on Risk News:
Long live longevity bonds?