Xpect Data and Indices for Pension Funds

Pension funds are currently significantly exposed to longevity risk. Unlike insurance companies, they do not have a kind of natural hedge with mortality risks in their liabilities. With respect to IFRS and prospectively Solvency II regulations, pension funds are forced to consider longevity risk in the validation process of their liabilities which is then reflected in the financial statements and solvency reporting to supervisors. Therefore, actual data about longevity changes are essential to correctly evaluate pension funds reserve assets. Pension funds are interested in hedging their longevity risks analogous to hedging interest and inflation risks. Traditionally, the longevity risk of pension liabilities has been transferred to the reinsurance market. However, the reinsurance market has only limited capacity to absorb additional longevity risk. It is therefore expected that alternative risk transfer products within the capital market will lead to capital relief under Solvency II.

A key issue for pension funds in evaluating longevity risks based on indices is the basis risk. Basis risk is defined as the difference in longevity between Xpect Data based on complete population data, and the pension fund-specific portfolio population. This difference could be due to higher income than average, differing health situations due to working environment, and many other factors.

On the other side, pension fund-specific populations are not large enough to be used as a basis to model and generate their own up-to-date generation life tables. Therefore, Xpect Data will be used to understand the monthly changes  in the general longevity of the population. Pension fund-specific longevity parameters representing the pensioners group could be added to the Xpect parameter. These parameters are available from scientific studies or from Deutsche Börse upon request. Xpect Data provides additional value to actuaries’ life tables.

Xpect Data and Indices are available for Germany, the Netherlands, England and Wales. Other countries will follow.