Addressing the Challenge of Global Ageing—Funding Issues

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Addressing the Challenge of Global Ageing—Funding Issues and Insurance Solutions
also argue that employers will not just be affected by the increasing cost of (definedbenefit)
occupational pension schemes but, longer-term, an aggravating shortage of
skilled labour—a threat which is arguably much harder to defuse. As far as insurers are
concerned the main and most direct impact of ageing is on their pension liabilities in
the form of annuity products. In this context, the authors discuss ways of mitigating the
various forms of mortality risk involved as well as innovative, capital markets-based
longevity risk solutions.
Milka Kirova, Vice President, Economic Research & Consulting, Swiss Re, assesses the
track record of insurance in the area of old age and longevity protection. She first makes
the fundamental case for insurance as a key potential contributor to managing old-age
risks. The limited nature of government-run and employer-based retirement plans means
that people should undertake supplementary saving and investment for retirement. “But
saving and investing are generally not enough since they require longevity and investment
risk management at the individual level that can most effectively and efficiently be
addressed through insurance,” Kirova emphasises. In her view the insurance sector is
well-positioned to help governments, employers and individuals address the challenges
of retirement funding and manage the risks associated with old-age protection. She
advocates drawing on the industry’s risk and asset management expertise, insurers’ ability
to diversify and balance risks, their pricing expertise and interest in longevity risk as
well as their risk bearing capacity, with global life insurance premiums amounting to
US$2.4tn in 2010, or close to 4 per cent of global GDP. Based on this broad portfolio of
competences, insurers can offer a wide spectrum of services to individuals and employers,
comprising longevity protection, asset protection, liquidity and flexibility, healthcare and
inflation protection. Kirova concludes that “(…) the insurance industry can play a pivotal
role in financing retirement by offering products that meet customer needs and by helping
the public make sound investment and insurance decisions”.
In his contribution Krzysztof M. Ostaszewski, Research Director, Life and Pensions, The
Geneva Association, discusses the impact of the most recent financial crisis on the four
pillars of old age protection. His starting point is the 25-year-old Four Pillar Programme
of The Geneva Association, the simple yet powerful key idea of which is that retirement
systems worldwide should be supported by the four pillars of (1) social security,
(2) occupational pensions and private insurance, (3) savings, where individuals save and
invest for their own retirement using financial intermediaries, including private insurance
companies, which can provide increased security of their benefits and mitigate longevity
risk and (4) continued employment, with barriers to partial employment that have existed
worldwide, either from governments or from employers, reduced or even removed.
He points out in great detail how, in the wake of the financial crisis, social spending
in many countries went up dramatically, significantly curtailing governments’ long-term
ability to sustain public pension systems. The post-crisis world is also characterised
by record-low rates of investment return and the prospect of a protracted economic
stagnation in the advanced countries, severely challenging the other three pillars of
the system. Ostaszewski points out that even before the current crisis, employers have
been under increasing stress because of the competitive pressures of globalisation and
increased longevity of current and future benefits recipients. “The financial crisis has
accelerated this trend,” Ostaszewski notes. It has also adversely affected people’s ability
to supplement their retirement income with private savings and continued employment,