24 November 2006
The market in mortality and longevity bonds could be set to grow
as insurance companies take a new approach to pension fund
risk.
Previously unforeseen increases in longevity have rung alarm
bells at pension schemes across the country. Employers who
underestimated the life expectancy of their employees have voiced
serious concerns over the affordability of pensions for scheme
members.
However, institutions have developed securities to mitigate the
increased risk, with mortality and longevity bonds among possible
new financial instruments. In particular, several new insurance
companies, set up to manage pension schemes, are taking a more
creative approach to risk than that followed by orthodox pension
schemes run by employers.
The idea of longevity bonds has been around for several years,
but attempts to market them failed before, partly because the price
wasn't right, but also because schemes were in the process of
deciding strategies, or because they had already decided against
investment vehicles of this kind.
However, the recent sale of a mortality bond by Axa indicates
movement in the market, with David Blake, professor of pension
economics at City University describing the size of the market for
this sort of instrument as "significant", and forecasting imminent
growth.
