Reducing Your Pension Risk

The Australian population’s life expectancy is increasing by one year, every seven years. Each year of increased life expectancy adds around 5% to a DB liability which needs to be funded by the plan sponsor, or in the government’s case, the tax payer. At a time when many Australian plans are poised to adopt a risk transfer strategy, this paper provides clarity and appreciation for the global markets approach to pension risk transfer and the hedging solutions that will be available to the Australian market.

A resurgent economy, strong equity markets and modestly higher interest rates are providing a tailwind to pension plan sponsors. The change in economic sentiment is driven in large part by expectations that companies will get a boost to cash flow from lower corporate tax rates, infrastructure spending and reduced regulations under the new administration.

Awareness of pension risk is increasing, yet the number of large companies implementing risk transfer solutions remains modest. Contributing to this hesitancy are five key misconceptions impeding sponsors from divesting pension obligations. This paper explores these myths in detail, demonstrates why they are false, and provides clarity around each.