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Longevity risk set to hit pension funds: State Street

Longevity risk set to hit pension funds: State Street

Killian Plastow
— 1 minute read

Rising life expectancy in the Asia Pacific is creating headaches for local pension funds, according to new research by State Street.

Pension funds in the region are losing confidence in their liability valuations off the back of significant increases in life expectancy, according an State Street survey of 400 pension professionals.

Recent World Health Organisation data indicates global average life expectancy increased by five years between 2000 and 2015, the biggest increase since the 1960s, according to State Street.

State Street's Asia-Pacific head of asset owner sector solutions, Beng-Eu Lim, said this trend poses new difficulties for pension funds.

“Advances in medical science combined with changing lifestyles in the region are driving up life expectancy and making it more difficult for pension funds to assess the extent of their liabilities”, he said.

The State Street research showed Australian pension professionals were the most confident about the accuracy of their asset and liability valuations, with the average confidence rating being 79 per cent, slightly above the global average of 76 per cent.

Mr Lim added that this lack of confidence is compounded by the growing use of alternative investment strategies in the pursuit of better yield in a low-growth environment.

“Asset owners are adopting more sophisticated investment strategies, chasing yield in a low-rate environment via more complex and illiquid alternative asset classes. This in turn is making it harder to assess their portfolio’s true value,” he said.

Asia-Pacific pension funds tended to more heavily weight longevity risk than their global counterparts, with 29 per cent of research respondents in the region listing it as a priority, compared with the global average of 26 per cent.

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Longevity risk set to hit pension funds: State Street
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