in Switzerland IOPS/IAIS PCG/Financial Supervisory Authority of - - PowerPoint PPT Presentation

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

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Current Situation

• Typical plan: „cash balance“ or defined contribution with guarantees
• Pensioner liability is borne mainly by pension funds:
• 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
• f 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 André Tapernoux

Pensioner liability in EUR billion 2012 Pension funds (statutory) 250 Life insurance companies 35

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Typical Pension Income

23,800 19,900 17,700 15,800 12,000

5.000 10.000 15.000 20.000 25.000 Minimum rate according to law Typical pension fund Annual expected income (lower interest rate) life insurance income with 95% Pension in CHF

• 16%
• 26%
• 50%
• 34%

Longevity Risk| Reykjavik 28 Feb 2014 André Tapernoux

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Example - 2013

Longevity Risk| Reykjavik 28 Feb 2014 André Tapernoux

Pensioner liability December 2013 CHF million % Current liability (statutory) 4,418 including future improvement of life expectancy (current expectation) 4,672 +5.8% improvement of life expectancy by 1.0 years (compared to current expectation) 4,792 +2.6% improvement of life expectancy by 2.3 years (compared to current expectation) 4,928 +5.5%

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Same Example - 2023

Longevity Risk| Reykjavik 28 Feb 2014 André Tapernoux

Pensioner liability December 2023 CHF million % including future improvement of life expectancy (current expectation) 2,600 improvement of life expectancy by 1.0 years (compared to current expectation) 2,755 + 6.0% improvement of life expectancy by 2.3 years (compared to current expectation) 2'919 + 12.3%

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Projected Cash Flows

50 100 150 200 250 300 350 400 2014 2019 2024 2029 2034 2039 2044 2049 2054 2059

+2.3 years +1.0 years Current expectation

Longevity Risk| Reykjavik 28 Feb 2014 André Tapernoux

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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 André Tapernoux