The longevity swap market is heating up with many employers / plan sponsors who offer traditional defined benefit pension plans eager to offload longevity-related liabilities to parties who are interested in assuming the risk.

A group of banks and insurance companies recently formed a London-based trade group called the Life and Longevity Markets Association (LLMA).

The LLMA aims to develop a liquid market for longevity risk that taps into broader capital markets rather than just the balance sheets of certain insurers and reinsurers.

A core focus will be on longevity swaps and making the longevity swap transaction process more efficient.

Longevity swaps serve as a risk transfer alternative to pension buyouts.

Demand for longevity risk has been returning to the UK pension market.

High levels of volatility during the financial crisis deterred many players in the pension buyout market.

The return to normalcy in the capital markets may, in fact, be contributing to under-pricing of longevity risk among those who are providing solutions to UK pension plan sponsors who seek to offload longevity-related liabilities.

A worthwhile article in the Financial Times discusses the range of options that are currently available to UK pension plan sponsors:

A survey of UK-based pension plan sponsors indicates that 40 percent expect longevity derivatives--such as longevity swaps--to play a strong role in mitigating longevity risk.

UK defined benefit pension plan sponsors are seeking solutions that will allow them to off-load the risk that their pension plan participants live longer than expected.

The UK is leading the world when it comes to hedging the longevity risk contained in many defined benefit pension plans.

In a $3 billion deal, Rothesay Life will be assuming the longevity-related liabilities of 55 percent of the plan participants of the RSA Insurance Group pension plan.

Goldman Sachs is the parent company of Rothesay Life. 

Liability swaps such as this are poised to gain traction in the UK, but are essentially non-existent in the United States since certain legal aspects of the transaction are still in question.

As reported earlier, a new derivatives market is evolving to deal with longevity risk.

Longevity swaps allow corporations and other pension plans owners to offload the risk of their plan participants living longer than expected.

The market for longevity swaps, however, has been developing very slowly.  Only one deal has taken place this year.

Corporate pension plans face the real risk of having their plan participants live longer than what is projected by actuaries.

In other words, similar to an individual who considers an annuity to offset the risk of outliving their assets in retirement, pension plans must deal with longevity risk.

A new derivatives market is evolving to deal with longevity risk on an institutional scale.  Many of the deals thus far have been between investment banks such as JP Morgan and insurance companies that want to hedge longevity risk across an entire block of business.