Thursday, July 16, 2009

Longevity Hedging

The newest form of Liability Driven Investing involves longevity hedging. When I mentioned here that one of the reasons BP was closing their defined-benefit plan to new employees was due to longevity, I suggested that one solution was to raise the retirement age. This would give the employer a longer period over which to contribute and a shorter period over which to pay out from the plan.

Another approach is for pension plans to actively hedge their longevity risk. Who are the buyers? There are companies that benefit from an aging population, such as pharmaceuticals and retirement residence owners. And there are hedge funds that perceive the huge underlying demand from pension plans as driving implied life expectancy levels out to a point that they are tempted to step in.

More to come....

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