Federal Occupational Pensions Regulatory Commission OAK BV Longevity Risk and Regulation in Switzerland IOPS/IAIS PCG/Financial Supervisory Authority of Iceland (FME) Seminar 28 February 2014 in Reykjavik, Iceland André Tapernoux, Head Risk Management OAK BV
Current Situation • Typical plan: „cash balance “ or defined contribution with guarantees • Pensioner liability is borne mainly by pension funds: Pensioner liability in EUR billion 2012 Pension funds (statutory) 250 Life insurance companies 35 • Risks in pension funds (for active and pensioner liability) are shared by active members and employers • Money follows active members, i.e. no vested deferred members, risk of losing money in case of partial liquidation (e.g. if part of company is sold) • Safety net („ security foundation “) only if pension fund is not able to pay pensions (e.g. in case of liquidation) => Active members and employers guarantee interest (swaption) and bear longevity risk (longevity swap) for pensioners, fair conditions have to be negotiated in boards Longevity Risk | Reykjavik 28 Feb 2014 2 André Tapernoux
Typical Pension Income 25.000 -16% -26% -34% -50% 20.000 Pension in CHF 15.000 10.000 23,800 19,900 15,800 12,000 17,700 5.000 0 Minimum rate according to Typical pension fund Annual expected income life insurance income with 95% (lower interest rate) law Longevity Risk | Reykjavik 28 Feb 2014 3 André Tapernoux
Example - 2013 Pensioner liability December 2013 CHF % million Current liability (statutory) 4,418 including future improvement of life 4,672 +5.8% expectancy (current expectation) improvement of life expectancy by 1.0 4,792 +2.6% years (compared to current expectation) improvement of life expectancy by 2.3 4,928 +5.5% years (compared to current expectation) Longevity Risk | Reykjavik 28 Feb 2014 4 André Tapernoux
Same Example - 2023 Pensioner liability December 2023 CHF % million including future improvement of life 2,600 expectancy (current expectation) improvement of life expectancy by 1.0 2,755 + 6.0% years (compared to current expectation) improvement of life expectancy by 2.3 2'919 + 12.3% years (compared to current expectation) Longevity Risk | Reykjavik 28 Feb 2014 5 André Tapernoux
Projected Cash Flows 400 +2.3 years +1.0 years Current expectation 350 300 250 200 150 100 50 0 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059 Longevity Risk | Reykjavik 28 Feb 2014 6 André Tapernoux
And the Regulator? Challenges: • Short-term expectations define future risk • (Future) active members and employers will pay the bill if results are negative • Minimum conversion on part of the savings is too high, but fixed in the law and approved in a referendum in 2011 by a high margin • Main responsibility is with boards, who decide on the share of risks that employers and active members take Response of OAK BV (regulator) • Minimum standards for actuaries • Annual risk report • Information and input on the new legislation • Information on different risk factors (e.g. longevity) => Raise risk awareness Longevity Risk | Reykjavik 28 Feb 2014 7 André Tapernoux
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