Tuesday, March 16, 2010
The Next Pension Disaster
"BMW AG's deal to unload E3 billion ($4.65 billion) of UK pension risk to Deutsche Bank Ag's Abbey Life unit is likely to be followed by similar deals as companies seek affordable solutions to mitigate their pension problems, a cash cow for banks and insurers. ... Pensions consultant and actuaries group Hymans Robertson [HR] said it expects more companies to agree to large longevity hedging deals this year. 'we think the longevity swaps market will cover more than Pound 10 billion of liabilities this year,' up from Pound 4.1 billion in 2009, said James Mullins, a longevity swap expert at [HR]. ... Abbey Life, in partnership with specialist pension insurance company Paternoster, are insuring the plan against the risk that around 60,000 retirees live longer than expected. BMW will pay a premium for the insurance, while Deutsche Bank will spread the risk among a consortorium of reinsurers, including Hannover Re AG, Pacific Life Re and Partner Re. ... One appeal of longevity hedging is that it doesn't require a major upfront cost. Paternoster business development executive Myles Pink said. Instead the company pays a monthly premium for the insurance. ... Hedging part of a pension plan's risk reduces the costs compared with selling the entire plan to an insurer", my emphasis, Kathy Gordon at the WSJ, 23 February 2010, link:
More terrible WSJ reporting. Spread the risk? Haven't we heard this song before? This is more derivative nonsense, another accounting scam. How can the insurers charge BWM less than the present discounted value of the "risk transferred"? How can BWM gain from this zero-sum game? Seek affordable solutions? Longevity swap expert? Hahahahaha! No upfront cost? What is the monthly payments' present value? This is absurd. BMW should fire Frederick Eichener, its CFO immediately! Does KPMG, BMW's CPAs, have anyone who understands what's going on here?