Insurers have been investing heavily in data analytics in recent years across all their business lines, with bulk annuities being no exception. Several insurers in the U.S. pension risk transfer market have started using ZIP codes to provide additional insights. These new data points are already having a twofold effect:
- Giving a more accurate understanding of plan longevity, highlighting that the old target that plan sponsors have been shooting at can sometimes be wide of the mark; and
- enabling insurers to get more confidence in refining their bid prices—ultimately reducing margins for prudence and overall prices.
But there is a third effect that may only be beginning: The impact on investment strategies for pension plans.
In this article, we consider the potential for blunt pension plan decision-metrics—which do not capture the true demographic diversity of the pension plan—to lead to poor investment decisions. We find it can apply to both plan sponsors whose strategy is to target termination through a series of annuity purchases, or those seeking to hibernate the plan, using liability-driven investing to insulate the sponsor’s profit and loss from valuation swings.
