Extreme longevity is one of the world’s top 30 extreme risks for investors, according to a report by the Thinking Ahead Institute.

As reported by our sister title, European Pensions, other risks included in the report are global temperature change, global trade collapse, cyber warfare, food/water/energy crisis, political extremism, World War III and natural catastrophe among others.

The report advised that pension funds that are worried about extreme longevity can purchase a longevity swap, or buy a credit default swap to insure against non-payment by a sovereign borrower.

“It is worth mentioning that cost and usefulness are often in opposition. The cost of derivatives protection can often be reduced by specifying more precise conditions – but the more precise the conditions, the greater the chance that they are not exactly met and hence the insurance does not pay out,” the report noted.

Describing how extreme longevity could be achieved, the report said that a major breakthrough in medical or human genome science, which could cure common banes such as heart disease, cancer and stroke could happen.

This could result in an unanticipated, significant increase in life expectancy for everyone, or the majority of people. In addition, even though life expectancy has increased steadily in recent history, these gains do not necessarily lead to better health in later life.

“The risk therefore also includes an emergence of a society with a growing number of the elderly who suffer chronic but non-fatal diseases – people live longer but their ‘productive’ years stay more or less the same…..A direct impact of longer lifespans on defined benefit pensions and annuities is increased liabilities; these systems could be overwhelmed by the additional cost of promised benefits.

“The economy will struggle to support the needs of a growing mass of the elderly who are in need of long-term health care and other support services. To the extent that governments are involved with pensions, either as payers or guarantors, they could be overwhelmed fiscally, spawning a sovereign debt crisis. Intergenerational politics will be stressed, as a smaller workforce will be asked to support a growing retiree group,” the report stated.

Looking at other risks, the extreme risks 2019 ranking saw global temperature change climb to the top spot which covers scenarios where the planet becomes far less habitable. The number two extreme risk is the potential collapse of global trade, driven by the rise of protectionism, primarily due to developments in global politics over the past six years. Joining in third place is cyber warfare. As the world has become ever more connected, the risk of the internet being weaponised has also increased.

Commenting, Thinking Ahead Group head, Tim Hodgson, said: “Our extreme risks ranking has seen the emergence of a general trend with financial risks falling down the rankings and non-financial extreme risks growing in significance. Global temperature change becomes the highest ranked risk due to our assessment of higher likelihood coupled with significant impact – in the extreme this would mean mass extinction.

“We believe that the world is subject to fundamental changes, whether environmental or political which will alter power balances. A complex world can and will deliver extreme outcomes that are hard to imagine when working with a normal distribution. That means extreme events are much more likely than previously thought. To navigate through this complex world, we suggest investors need to be open-minded, avoid concentrated risks, be sensitive to early warning signs, constantly adapt and always prepare for the worst.”

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