Longevity Swap

Sponsors of defined benefit pension plans use longevity swaps to hedge longevity risk. A longevity swap is similar to an interest rate swap where floating interest rates are exchanged for fixed interest rates. With a longevity swap, the counter party to the plan sponsor is typically an investment bank.If plan participants live longer than expected, the plan sponsor receives payments from the investment bank. If plan participants die sooner than expected, then the plan sponsor makes payments to the investment bank. Investment banks typically package and sell the longevity risk to institutional investors.

Longevity Derivatives to Play a Role in Defined Benefit Pension Plans

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. Use of derivatives to address longevity risk and other pension funding related issues serves as an alternative to other solutions such as a full pension...

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Longevity Derivatives

Pension Buy-Out

Longevity Swap

Derivatives

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Longevity Derivatives

Pension Buy-Out

Longevity Swap

Derivatives

UK Providing Leadership in the Longevity Swap Market

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...

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Longevity Swap Market Developing Slowly

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. Industry participants note that there is a slight backlog of deals and that roughly a half dozen deals should take place during the remainder of the year...

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New Derivatives Market Taking Shape with Longevity Swaps

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...

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