In a new policy advisory issued today, federal financial regulators say that pension plans can use swaps or insurance contracts to hedge longevity risk; and it sets out its expectations for this sort of hedging.
The Office of the Superintendent of Financial Institutions (OSFI) issued a draft advisory today that spells out OSFI’s expectations to federal pension plan administrators when using longevity insurance, or swaps, as a way of reducing their plan’s exposure to longevity risk.
The advisory examines the types of longevity risk hedging contracts that exist; the risks to pension plans associated with these sorts of hedges; considerations for plan administrators who are contemplating longevity risk hedges; and, OSFI’s expectations for plan administrators that utilize longevity risk hedges.
These sorts of arrangements are new to North America, OSFI notes, adding that plan administrators in Canada are beginning to consider the use of longevity risk hedging contracts.
It says that it has no objections to a pension plan entering into a longevity risk hedging contract, as long as the investment is permissible under the terms of the plan, and it complies with other regulations.
However, it also says in its advisory, “Longevity risk hedging contracts introduce new challenges for plan administrators, who must consider their complexity, costs and resulting risks.”
“A plan administrator who is considering entering into a longevity risk hedging contract must not only understand the risks and benefits that this transaction introduces to the pension plan, but also understand the terms of the contract,” it stresses.
Along with the draft policy advisory, OSFI also issued a letter in support of a recently released draft consultation paper from global regulators that addresses the issue of longevity risk transfer.
OSFI is seeking comments on its draft policy advisory by Dec. 6