State Street : Longevity Risk Concerns Drive APAC Pension Professionals to Focus on Improving Liability Valuations

Increasing life expectancy is undermining pension funds' confidence in their liability valuations, while growing allocations to alternative assets are making it harder to value the funds' portfolios. A global survey of 400 pension professionals, commissioned by State Street, reveals that one in 20 describe their confidence in the accuracy of their asset and liability valuations as less than 50 percent. Only 21 percent have confidence levels in the 90 to 100 percent range. Confidence drops further in the Asia Pacific (APAC) region with only 13 percent having confidence levels in this range.

Life expectancy globally increased by five years between 2000 and 2015, the fastest increase since the 1960s, according to recently released World Health Organization (WHO) data. Japan, Singapore and Australia are among the top five countries where people live the longest, with average life expectancies of 83.7, 83.1 and 82.8 respectively.[1]

'Advances in medical science combined with changing lifestyles in the region are driving up life expectancy and making it more difficult for pension funds to assess the extent of their liabilities', said Beng-Eu Lim, Asia Pacific head of asset owner sector solutions at State Street.

With this in mind, managing longevity risk is a priority in APAC developed markets where life expectancy is among the highest in the world. 29 percent of respondents across the region, and as much as 50 percent in Japan, say they give the highest level of priority to managing longevity risk. This compares to just 26 percent globally.

'At the same time asset owners are adopting more sophisticated investment strategies, chasing yields in a low rate environment via more complex and illiquid alternative asset classes. This in turn is making it harder to assess their portfolio's true value', said Lim.

'Our survey reveals that one in two APAC pension funds plan to increase their exposure to fund of hedge funds in the next three years. A similar proportion plans to invest more in real estate over that time.'

Unsurprisingly, given these concerns about longevity risk, more than half of the APAC respondents see the challenge of effectively aligning assets with liabilities as 'high' or 'very high'.

Within the region, Australian pension professionals are the most confident about the accuracy of their asset and liability valuations with an average rating of 79 percent, closely followed by Japan (74 percent). Respondents from Hong Kong and Singapore are the least confident (65 percent combined), with no respondents rating their confidence at 90-100 percent. The global average is 76 percent.

State Street's research into the views of asset owners can be found in its report entitled Pensions with Purpose: Meeting the Retirement Challenge. To download this,click here.

[1] World Health Statistics 2016. http://www.who.int/mediacentre/news/releases/2016/health-inequalities-persist/en/

About the Research

On behalf of State Street, Longitude Research, a global research firm, conducted the survey of institutional asset owners in October and November of 2015. The survey garnered 400 responses from pension fund professionals, spanning both defined contribution and defined benefit assets across 20 countries. More than two-thirds (68 percent) of respondents came from private sector pension systems, 25 percent from public sector pension funds and 7 percent from superannuation funds. 30 respondents were from Australia, 30 from Japan and 40 from Hong Kong / Singapore.

About State Street
State Street Corporation (NYSE: STT) is one of the world's leading providers of financial services to institutional investors, including investment servicing, investment management, and investment research and trading. With $27 trillion in assets under custody and administration and $2 trillion* in assets under management as of March 31, 2016, State Street operates in more than 100 geographic markets worldwide, including the US, Canada, Europe, the Middle East and Asia. For more information, visit State Street's website at www.statestreet.com.

* Assets under management include approximately $33 billion as of March 31, 2016, for which State Street Global Markets, LLC, an affiliate of SSGA, serves as the distribution agent.

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