A growing crisis in the global pensions system represents a major opportunity for the life re/insurance industry to close the funding gap, according to a new report by the Swiss Re Institute.
Swiss Re found that the shortfall in pension funding for the global retired population is forecast to grow by 5% annually, rising from $70 trillion in 2015 to $400 trillion by 2050.
At this level, sigma data shows that the global pension gap will be 108% of gross domestic product (GDP) in 2050, with the U.S, China and India expected to have the biggest shortfalls in funding.
Swiss Re believes that re/insurers can play a key role in narrowing the global pension gap by providing risk transfer solutions for underfunded private Pillar 2 schemes, and with annuity products to encourage more discretionary saving for retirement.
With expertise in longevity and mortality risk management, life insurers can offer customised pension risk transfer solutions to underfunded defined benefit plans to reduce the earnings volatility of the plans’ corporate sponsors.
Insurers can also customise annuities to help individuals better manage the longevity risk inherent in Pillar 3 discretionary/voluntary retirement savings, the report claimed.
The global pensions system has faced challenges from a number of factors in recent years, including rising global life expectancy and falling birth rates, increasing automation of work processes, low interest rate environments and a larger amount of negative yielding sovereign debt.
In this longer-term lower growth and low inflation environment, returns achieved on pension funds are mis-aligned with benefit payment projection and individual saving expectations, Swiss Re said.
Pension managers have increasingly been allocating funds to non-Treasury investments, corporate credits, foreign assets and private equities, but the risk-return profile of these can face significant downside risks.
Sponsors of pension plans can include government, employers and individuals, but Swiss Re noted that a large public-sector retirement funding gap will remain a major concern in a lower-growth environment as public finances remain under pressure.
Governments and multinational institutions have recently advocated for more private sector participation in pension financing, with Pillar 2 schemes slowly shifting from defined benefit to defined contribution pensions and now accounting for 50% of global pension assets.
