Posted: 2010-03-15 23:57 New Retirement Thinking  Presenter: Giulietta Talevi Guest(s): Joe Frasco Summit TV speaks to Joe Frasco principle consultant and head of investment research at Alexander Forbes Asset Consultants about the first international actuarial conference held every four years to be hosted in Africa Giulietta Talevi: Welcome to New Retirement Thinking. Actuaries from around the world have just hosted their annual international congress for the first time in Africa - joining me now with a report back is Joe Frasco principle consultant and head of investment research at Alexander Forbes Asset Consultants. Joe, it’s almost like the World Cup of actuary conferences because it happens every four years - what was the conference all about and why bring all the worlds actuaries together at this event? Joe Frasco: It’s a great opportunity for actuarial minds from around the world - we have our local conferences as well, but this is an opportunity to get thoughts from around the world in terms of new actuarial thinking, how the market is developing, and what new areas actuaries are getting involved in. Typically actuaries will have written papers for actuarial journals or financial journals of some type - and this gives them opportunities to present that to their colleagues and for their colleagues to query that thinking and possibly look at applying the thinking in their local environment… Giulietta Talevi: Is it the world’s big pension companies - do you draw delegates from across the globe? Joe Frasco: Typically academia is well represented in these conferences and companies - from the insurance company spaces where actuaries have played a role, the asset management industry, life and non-life insurance, health and as well as business - so you could have pension fund specific actuaries also attending… Giulietta Talevi: What were some of the themes of this year’s conference? I’d imagine that a lot had to do with the global financial crisis that we’ve recently emerged from - was that one of the dominant themes this year? Joe Frasco: Certainly one of my areas of interest is financial risk management and enterprise risk management - I attended a couple of those. From my perspective the global financial crisis was certainly on the agenda and well represented - but other areas of interest may have been under health, social security or health reform, and just general thinking around what’s happened to pension funds generally after the global financial crisis and how they are dealing with those issues - so not necessarily focusing on the crisis but almost how we go forward in terms of applying some actuarial thinking? Giulietta Talevi: What is the thinking? Perhaps you can give an idea of what the upshot is especially as you say this is your particular area of expertise - enterprise risk management and the after effects of the financial crisis - what have the best brains in the business come up with? Joe Frasco: The really interesting things from our side because these are issues where we’ve been dealing with clients taking them through it over the last couple of years - but more so today because going through this bull market we went through in South Africa with phenomenal returns where you quadrupled your money with 300% returns up until the height of the market before the global financial crisis, and then the downturn and the losses that we made there - a lot of retirement funds were sitting in well funded positions and had the opportunity to take risk off the table, but that was very difficult for them to do. It’s difficult to understand the markets can go down when you’ve had from the bottom of 2003 until the top of 2008 all you’ve had is the markets going one direction - so things like longevity swaps was certainly one where there were a couple of sessions on that. Giulietta Talevi: You’d have to explain to the layman what a longevity swap is… Joe Frasco: I will go back to the other dominant themes that came across where typically you get rid of your financial or market risk - so you’re invested in the equity market, but equity markets can go down by 50% as we saw in South Africa going down by 46% from the height to the bottom. That’s fine - a lot of pension funds can take on strategies to get rid of those types of risk and we’ve been dealing with that for a while. A longevity swap is where pension funds keep their pensioners within the fund and carry on paying for their pensions until the day they die - or their spouses die if there’s a spouse annuity - the problem that exists is the pension fund doesn’t know today how long that member is going to live. Even though we have mortality tables as actuaries that we can apply to a big group of people - and that group should follow those mortality expectations - the problem is that with the advances that we are seeing on the medical side people are tending to live a lot longer. One of the fascinating talks indicated that over the last 150 years mortality has improved by three months for every year of the last 150 years so effectively where life expectancy if we take a quarter of the last 150 years life expectancy had increased by about 37.5 years over the last 150 years. That’s a long time period and obviously there are fluctuations in that so the problem that a pension fund has to deal with is today it may be fully funded - but if people live longer than expected they may sit with a problem. What a longevity swap allows you to swap out that mortality and look for a counterpart who can take on that risk - to maybe swap that risk with a pension fund. That’s another way to mitigate the risk they’re sitting with within the funds. Giulietta Talevi: That sounds fairly complicated - is there any downside or is there any risk to taking on a longevity swap? I’d imagine that is the way that a lot of pension funds are going to have to go as you say with life expectancy rates increasing - we hear people who will live to 125 are being born already… Joe Frasco: Absolutely. One of the issues that you deal with - and this isn’t by any means the only way to deal with longevity risk, there are other ways that have traditionally assisted pension funds with that - the problem with this one is we are dealing with events that could be 50 years out into the future so if I had to enter into a swap I might be expecting you to make good payments to me 50 years hence when people are living longer than expected. Within the capital markets 50 years could be a long time and counterparties could cease to exist or may not have the funds to make good - so you have to look at issues like collateral and have they got enough money maybe marking to market those positions to make sure that if they owe you money they are going to be around to pay. Giulietta Talevi: The next conference is in 2014 - do you think longevity swaps would become a dominant feature of development in pension funds? Joe Frasco: I think it is going to be an exciting feature. As South Africans we haven’t really been in the process of engaging with clients and actually implementing a lot of these things - but we’ve seen in Europe it’s happening more and more so I think that what you will find is more success stories being spoken about, more issues around contractual and legal obligations, etcetera, being dealt with so I think we will see great developments there. www.summit.co.za Printing? Please think of the environment. 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