Pension Liability Securitization via Special Purpose Vehicle
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Solution Overview
Problem
The pensions sector faces challenges in managing and transferring risk associated with pension liabilities, particularly longevity risk, due to inadequate risk management systems and limited capacity in the insurance market, leading to volatility and increased costs for corporate sponsors.
Innovation Solution
A capital markets methodology and system for securitizing pension liabilities, using securities and derivatives to transfer risk, including longevity risk, from pension schemes to the capital markets, enabling accurate risk assessment and compliance with regulatory requirements, and providing financial instruments that match cash flow requirements based on actual member data.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If pension liabilities are managed using traditional insurance market mechanisms, then risk transfer capacity is limited, but system complexity and cost increase
Solution Approach 1:
The patent introduces a special purpose vehicle (SPV) as an intermediary entity to facilitate the securitization of pension liabilities. The SPV issues securitized financial products that transfer longevity risk from pension schemes to capital markets investors, thereby expanding risk transfer capacity beyond traditional insurance market limitations while maintaining manageable system complexity through a structured intermediary framework
Solution Approach 2:
The patent transforms pension liabilities into tradable financial securities by changing the parameter representation from insurance contracts to securitized financial products. This parameter change enables risk transfer to the broader capital markets, significantly expanding risk transfer capacity while the standardized securitization framework keeps system complexity controlled
2Measurement precision
If mortality assumptions are based on reference population data, then measurement is simplified, but accuracy deteriorates due to scheme-specific variations
Solution Approach 1:
The patent applies local quality by using reference population mortality data as a baseline and then adjusting it with scheme-specific factors such as socioeconomic characteristics, lifestyle factors, and actual mortality experience of the pension scheme members. This approach maintains measurement simplicity while improving accuracy by tailoring the mortality assumptions to the specific pension scheme's population characteristics
Solution Approach 2:
The patent incorporates feedback mechanisms where actual mortality experience of pension scheme members is continuously monitored and used to refine and update mortality assumptions. This feedback loop improves measurement precision over time by adjusting reference population data based on observed scheme-specific mortality patterns, while the automated data processing framework manages the complexity of implementing this feedback system
3Adaptability or versatility
If pension risk management systems are developed for actuarial and consulting needs, then industry-specific requirements are met, but compliance with capital markets standards deteriorates
Solution Approach 1:
The patent creates a multi-functional securitization framework that simultaneously meets actuarial and consulting requirements for pension risk management while also satisfying capital markets standards for securitized products. The special purpose vehicle structure and standardized securitization process serve multiple functions: transferring longevity risk, providing regulatory compliance, enabling capital markets participation, and maintaining actuarial accuracy, thereby achieving both industry-specific adaptability and capital markets reliability
Data Source
AI summary
There is provided a computer-implemented method of projecting the future cash flows of a pension scheme, comprising: receiving data representative of the members of the pension scheme; receiving data representative of a mortality assumption; calculating, using data processing apparatus, for each pension scheme member, a projection of the future cash flow liabilities of the pension scheme to that member on the basis of the pension scheme member data and by applying the mortality assumption data to the pension scheme member data; and generating, using data processing apparatus, data representative of a projected liability cash flow of the pension scheme to all of its members by aggregating the liabilities to each member.