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.

Recently, though, a British engineering company--Babcock International--struck a deal to hedge over $700 million worth of pension liabilities through a longevity swap.

Source: Reuters