Index-Based Longevity Swaps: The Next Big Thing?

Abstract

2011 was a record year for U.K. pension schemes using longevity swaps to de-risk, with over £7 billion of liabilities being transferred from schemes to banks, insurers, and reinsurers. While the pension de-risking market has blossomed since its inception three years ago, schemes have faced restricted options to transfer longevity risk specifically.

All but one of the longevity risk transactions to date has been “bespoke,” based on the pension scheme’s own specific longevity experience. While providing a precise hedge, these transactions have limitations and have been the preserve of large, well-resourced schemes. A new solution is needed for the market to develop and broaden to smaller schemes. Recent innovations in the “index-based” longevity swap market, enabling scheme-specific tailoring, has signaled a potential solution to this barrier and merits further consideration.