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Home > Financial Risk Management Best Practice > Obstacles to the Further Development of the Longevity Swaps Market for Pension Funds

Financial Risk Management Best Practice

Obstacles to the Further Development of the Longevity Swaps Market for Pension Funds

by Martin Bird and Tim Gordon

Conclusions

We expect that the UK longevity swaps market will continue to grow as pension plans continue to bear down on risk generally and continue to mature. In most other defined benefit-oriented countries, the regulatory regime and/or no pension increases mean that pension plan longevity risk is typically not as financially material as in the United Kingdom. We therefore do not expect to see longevity swaps make as much inroad in these countries, although we do consider it reasonably likely that a major non-UK pension plan will implement a longevity swap within the next couple of years.

Index-based longevity solutions have failed to take off so far. Moreover, the problems associated with them, most notably basis risk, mean that we are skeptical about their future as a vehicle for pension plans to mitigate their longevity risk. Index-based solutions may, however, have a role to play as a means of exchanging longevity risk between insurers.

Finally, we expect implementation costs to reduce over time as longevity swap contracts gradually become more standardized.

Notes

  1. Office for National Statistics. “Statistical bulletin: Population estimates for England and Wales, mid-2002 to mid-2010 revised (National).” December 13, 2012. Online at: www.ons.gov.uk/ons/dcp171778_288817.pdf

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Further reading

Report:

  • Life & Longevity Markets Association. “Longevity pricing framework: A framework for pricing longevity exposures developed by the LLMA.” October 29, 2010. Online at: tinyurl.com/ln29zgn [PDF].

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