Innovative ways of financing retirement

In this day and age where financial innovation is (wrongly!) blamed for the end of capitalism and the world as we know it lock, stock and barrel, the title of SwissRe's latest edition of Sigma is courageous. Nevertheless, it is a comprehensive assessment of the growing role that insurance will have to play in the provision of old age retirement funding, where insurance is to be understood in a functional rather than an institutional sense. 

An important section of the study is dedicated to managing retirement product risks. Longevity risk is identified as prominent among them, but its management is limited by the rather shallow depth and breadth of longevity risk markets. Notably absent from that section, however, are considerations on valuation techniques. If there is one thing that we can learn from the current crisis, then it is how crucially important it is to value & stress test innovative products properly over their entire life cycle.

CEIOPS State of Pensions Report

CEIOPS' Report on financial conditions and financial stability in the European Insurance and Occupational pension fund sectors has a good section (starting p. 22) about recent developments in the European pension funds market, giving insights into last year's changes in a number of countries and a statistical overview, based on Eurostat.

ILMA news

While the recently founded Institutional Life Markets Association (ILMA) still seems to have no proper website, a document containing its guiding principles has surfaced on the web. It's interesting to glean from it that the Association is explicitly positioned in opposition to Defined Benefit pension funds.

Ask the economist

The OECD has published an interesting protocol of an online debate with OECD economists about the pensions challenge. There's plenty of materials and food for thought there, especially in the background readings listed, or the annuity debate; one wonders whether the lack of private annuity products may not to some extent be due to an effective crowding out by mispriced public policy alternatives - but unfortunately that question is not touched upon.

Annuities: a private solution to longevity risk

Its title may appear a bit facetious, but the latest issue of SwissRe's Sigma is anything but. It contains a comprehensive overview of the challenges to capital based retirement provision arising from increasing longevity. The prime focus of the publication is on insurers and insurance products, naturally, but most of its considerations and precepts are directly applicable to non-insurance pensions providers. A very worthwhile read for everyone in the retirement business!

Liechtenstein attracts IORPs

IPE has an interesting story about German insurance LV 1871 bringing its pan-European pension fund to Liechtenstein. Other institutions are also confirmed to be interested in this location, which is entirely in line with our assessment of Liechtenstein as one of the competitive locations for European IORPs.

Early birds

There is no more appropriate way to start the first post of the year than by dedicating it to an early bird, even though the year is well advanced already. The early bird in question is Allianz with its European ComPension product, the first product that has been designed with a pan-European pensions market in mind. Meanwhile, we've had a bit of time to look at this interesting solution, which is only the first of several products that are currently under development, as we hear.

European ComPension is a fairly plain-vanilla insurance retirement product that is available through Allianz's international network, but only in France, Italy and Germany for now. Unsurprisingly, it offers only DC solutions, although this entails a guaranteed minimum return in Germany. The pricing reflects the first mover advantage. Assets are invested in one of two new Luxemburg based Allianz Global Investors European Pension funds Dynamic or Balanced which invest in an opportunistic combination of Euro area stocks and bonds.

Given the somewhat moderate pace of the market, I am not sure whether the first mover advantage is really that big in the case in point. European ComPension has obviously been designed from a network perspective so as to not cannibalise the network's incumbent business. As it is our view that the pan-European pensions market has the potential to disrupt insurance networks in that specific segment, it is probably unwise to choose such a development approach.

While the choice of the development approach may be ill advised but comprehensible, it is hard to understand the investment strategy of the funds on offer. The geographic limitation of investments to the Euro area appears to present such a strong impediment to the portfolio's potential efficiency that one may wonder whether this is in line with the Prudent Person Rule at all.