Why Pension Funds Are Natural Long-Term Investors in Life Settlement Funds
Pension funds have long-term liabilities which they need to pair with long-term assets. That is partly why they are significant investors in government and corporate bonds and mortgage-backed securities, all of which provide a consistent, long term, return with lower volatility than public or private equity markets.
Over the past two decades, however, pension portfolios have evolved significantly. Lower bond yields in the post-Global Financial Crisis decade, longer life expectancies and the need for greater diversification have encouraged pension fund investment committees to increase and broaden their allocations to private assets and alternative investment strategies. Infrastructure, private credit, real estate and hedge funds, for example, now commonly sit alongside traditional fixed income and public equity exposures in pension portfolios.
But the macroeconomic uncertainty of the past few years has meant that another alternative asset class, life settlements, is more frequently being considered by pension funds as another complementary source of long-duration, diversified return. Three features of the asset class, all complimentary to pension funds approach to portfolio construction, are contributing to this trend.
Alignment with Long-Duration Pension Liabilities
Pension funds manage obligations that extend decades into the future. As a result, assets that can generate long-duration cash flows are particularly valuable in pension fund portfolio construction.
Life settlement portfolios naturally share this long-term profile. Policies are typically held over multiple years until maturity, with payouts defined by the insurance policy’s contractual face value. While the precise timing of individual maturities depends on longevity outcomes, diversified portfolios allow managers to model expected cash flow patterns across a large number of policies thanks to the actuarial nature of the approach to portfolio construction.
At the portfolio level, this actuarial approach means that cash flow expectations are not dependent on the performance of financial markets; they are based on demographic modelling across a diversified pool of insured lives instead. For pension funds accustomed to analyzing liabilities using similar actuarial frameworks, this structure can be particularly intuitive, making life settlements a natural complement to other long-duration assets.
Diversification Through Longevity-Linked Returns
Traditional pension fund portfolios are heavily exposed to macroeconomic assets such as public equities and corporate fixed income (both public and private). While private market allocations tend to be less volatile, in periods of macroeconomic and/or geopolitical stress, correlations across asset classes can rise, limiting the protective value of allocations to assets with diversification in mind.
Life settlement returns, however, are primarily driven by insured mortality experience and the disciplined management of premiums and policy servicing. They are largely independent of GDP growth, central bank policy, inflation shocks or geopolitical events. This low correlation to traditional markets can enhance overall portfolio resilience, particularly during periods of market dislocation.
This independence from traditional economic drivers means that life settlements can behave very differently from other assets during periods of market stress. When equity markets reprice or credit spreads widen, life settlement portfolios continue to be driven primarily by insured longevity outcomes and premium management.
For pension funds that have already embraced private equity, private credit, real assets and hedge funds in pursuit of diversification, life settlements represent an additional, genuinely differentiated source of return.
Attractive Institutional Risk-Adjusted Returns
Pension funds must balance long-term capital preservation with the need to generate sufficient returns to meet their funding obligations. In that context, life settlements can occupy an attractive position within a broader private asset allocation.
Institutional life settlement portfolios have historically targeted high single-digit to low double-digit returns, depending on strategy and portfolio construction. Active management of life insurance policies supports these results; pricing inefficiencies that can arise in the secondary market, specialized underwriting and servicing capabilities required to manage these portfolios effectively and vertically integrated life settlement providers and asset managers all provide for a return profile that can be higher than the prevailing risk-free rate.
For pension investors navigating a challenging yield environment, life settlements can therefore provide a differentiated source of return that sits between traditional fixed income and higher-risk, higher volatility private market strategies.
Additional Portfolio Characteristics
Beyond these core attributes, life settlement portfolios offer several additional features that may appeal to institutional investors. Policy payouts are contractually defined by the issuing insurance carrier, for example: Life insurers generally are remarkably strong risk counterparties. And the existence of both a secondary and tertiary market provides significant flexibility that allows managers to rebalance holdings where appropriate.
Taken together, these characteristics help explain why life settlements are increasingly being evaluated by pension funds seeking diversified, long-duration sources of return within their alternative allocations. The combination of reliability, diversification, and return potential makes life settlements a compelling complement to both traditional and alternative assets, helping portfolios meet both their short-term liquidity needs and long-term obligations.
Ryan Byrd is President at SLG Life Settlements
