Pension Risk Matters

"Death" Derivatives and Longevity Related Pension Risks

As seniors continue to live hopefully fulfilling lives, plan sponsors grapple with how to best manage the costs. The realities of longer life spans for participants is creating all sorts of innovation on Wall Street, including what Bloomberg journalists recently described as "death derivatives."

In a May 16, 2011 article, Oliver Suess, Carolyn Bandel and Kevin Crowley describe products that could encourage defined benefit plan executives to "outsource" by transferring risks to longevity traders or entering into a financial engineering transaction in order to receive a regular cash flow that mirrors their respective ongoing obligations to retirees. What happens next, depending on how capital market participants respond to a few test cases, could mean the growth of a $23 trillion market in longevity bonds and related derivative instruments.

As with any financial engineering endeavor, education will be paramount in terms of both plan sponsors and securitized pension obligation buyers understanding underlying assumptions and risk-return attributes.

Click to read "Death Derivatives Emerge From Pension Risks of Living Too Long."

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Comments (1) Read through and enter the discussion with the form at the end
Jonathan Jacob - May 21, 2011 12:55 PM

I think the main issue is finding enough counterparties to take the other side of the trade. What bothered me about this article (as I explain in my blog) was that Glaxo was one of the users of this hedge when in my estimation they should be a provider, since the pharma industry stands to benefit greatly from longevity: namely, a longer period for us to consume more pharmaceuticals.

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