Tackling longevity risk is becoming an increasing priority for UK defined benefit (DB) pension schemes, as more schemes reassess their endgame strategies amid a growing focus on run-on, according to Aon.

The firm explained that improved funding levels in recent years have created both new opportunities and challenges for schemes, prompting trustees and sponsors to revisit their risk management approaches.

This includes considering whether to run-on for a period before buyout, or to adopt a long-term run-on strategy, with longevity risk now forming a key component of these deliberations.

Aon suggested that, alongside evolving strategy considerations, favourable pricing and solutions available in the global reinsurance market were expected to drive increased activity in the longevity risk transfer market.

Indeed, Aon head of demographic horizons, Matthew Fletcher, said many schemes had seen significant improvements in funding levels and had already mitigated key market risks such as inflation and interest rates, leading them to reassess their remaining exposures.

He stated that, regardless of the endgame being targeted, longevity and broader demographic risks were set to play an increasingly prominent role in decision-making.

“These risks are real and material - we have recently seen changes in liability values of more than 2 per cent over a single year, solely due to re-calibration of the Continuous Mortality Investigation mortality projection model,” Fletcher noted.

He added that longer-term developments, including advances in healthcare, the expansion of GLP-1 medications, the increasing use of artificial intelligence in healthcare, and macroeconomic factors such as changes in government spending on the NHS, could all materially impact scheme liabilities and endgame timelines.

Aon UK partner, risk settlement team, Hannah Brinton, added that the current pricing to mitigate longevity risk was “highly attractive”, supported by strong appetite from the global reinsurance market.

She stated that the longevity hedging market was now well established, with pricing having “reduced dramatically” in recent years, while access had broadened beyond the largest schemes.

With this in mind, Brinton explained that longevity swaps were no longer limited to schemes with assets exceeding £1bn, as increased reinsurance appetite and structural simplifications had enabled a wider range of schemes to hedge longevity risk for both current and future pensioners.

She also emphasised that hedging longevity risk remained compatible with maintaining flexibility for future annuity purchases, meaning it could support both run-on and buyout strategies.

“Taken together, these developments mean longevity risk management should be a priority item on trustee and sponsor agendas,” she added.

---