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Demystifying Longevity Risk Collateral Structures

As life expectancy continues to rise, Mark Austin, examines how pension funds can navigate complex longevity risk collateral structures.

As life expectancy continues to rise, pension funds across Europe are increasingly looking to de-risk some of their liabilities by entering into an agreement with an insurer.1

These arrangements are typically supported by collateral structures, which are often complex to navigate. However, they don’t need to be.

The process of longevity collateral management can be simplified by early engagement, preparation, and management of all parts of the project lifecycle, according to Mark Austin, Northern Trust’s Head of Asset Owners, UK, and Pensions and Insurance Executive, Europe.

Imagine that you need to transfer your scheme’s longevity risk to an insurance company as part of a wider de-risking strategy. Typically these types of transactions utilise a collateralised structure to achieve their aims. However, the deal is rife with complexity and a myriad of interested parties. You will have a multitude of advisors, actuaries, and legal consultants to help facilitate the transfer to a fronting insurer. Your collateral services provider is also there to ensure that operationally things go smoothly. In the end, the structure becomes overly advised by a plethora of professionals, and as a stakeholder, you may find yourself buried in the middle of the process.

Whether you are pension fund trustee, an advisor or a consultant, collateral structures are complex to navigate. This paper explores how longevity collateralisation structures work to support the transfer of risk and breaks down their different components to demystify the process around them and support stakeholders through the process.

Introduction to Collateral Structures

Broadly speaking, collateral solutions are used to mitigate counterparty risk, particularly in any reinsurance arrangement where there are concerns about things going wrong and the trustee being unprotected against a loss of assets, or the insurer in turn not collecting its fee. They are like life vests under the seats on airplanes. It is highly unlikely that you will ever have to use them, but they are necessary.

There are different options for pension schemes to de-risk using an insurance company. One of these is a “buy in” where a portion of a pension scheme’s risk is transferred to an insurance company. Under this option, the pension scheme holds an insurance policy representing that transaction and, in the meantime continues to pay its pensioners. A second option known as a “buy out” goes further and involves all risk being transferred to the insurer which takes full responsibility for all liabilities. A third option – and the focus of this paper – is concentrated exclusively on longevity risk insurance.

Find out more.


1. Source: Derisking Report 2022, Willis Towers Watson, January 2022

Mark Austin portrait

Mark Austin

Pensions and Insurance Executive, EMEA
Mark leads the growth strategy for the Pensions and Insurance business across the EMEA region.


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