Pension Corp calls for longevity-linked bonds

By Sarah Hills

LONDON (Reuters) - The government should issue bonds linked to the longevity of the population to help pension schemes and insurers manage the financial pressure of increased life expectancy, Pension Corporation said on Tuesday.

Dramatic increases in life expectancy have left private sector pension funds and annuity providers with massive exposure to longevity, and there are few options currently available to hedge this risk on any significant scale within the private sector.

Similar to the introduction of inflation-linked gilts first issued for pension funds in 1981, the government could issue a longevity-linked government bond, creating a hedge against the financial risks posed by increase life expectancy, according to specialist British pension manager Pension Corp.

Such a move would help start a trading market for longevity risk, just as how index-linked gilts led to the creation of an inflation term structure and the development of inflation swaps.

"The government developed a much larger market where various parties traded to their optimal positions in regards to inflation," John Fitzpatrick, a partner at Pension Corp, told Reuters.

"That market is many multiples larger than the index-linked gilt market today. The same thing needs to happen to longevity," he said.

With the creation of a private sector longevity derivative market, price points along a mortality terms structure could be created.

As there would be a pure price for longevity risk, institutions such as pension funds and pension insurers could trade these derivatives on the Insurance Linked Securities (ILS) market.