Interesting article in the FT about longevity swaps.
I find it slightly alarming that one of the drivers appears to be ” investment banks … desperately hunting for new, high-margin businesses to replace the structured products and credit trading of the boom years.”
The article also adds that:
“One thing most agree on is that larger deals from very big pension schemes are better because there is more data on mortality and more diversity of lifestyles. However, the law of large numbers was also held up as a mark of safety for the securitisation of residential mortgages.”
Coupled with another FT report about the concerns of the Bank for International Settlements that there has been a resurgence of the “excessive risk taking” by investment banks that sparked the financial crisis, it would seem clear that trustees and sponsoring employers need to ensure they fully understand the risks involved in such complex transactions.
As always, you can do a great deal worse than turn to Dilbert for a cogent analysis of the risks of relying on the law of large numbers!!