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DISCUSSION PAPER PI-1002

Sharing Longevity Risk: Why Governments Should Issue Longevity Bonds

David Blake, Tom Boardman and Andrew Cairns

Government-issued longevity bonds would allow longevity risk to be shared
efficiently and fairly between generations. In exchange for paying a longevity risk
premium, the current generation of retirees can look to future generations to hedge
their aggregate longevity risk. There are also wider social benefits. Longevity bonds
will lead to a more secure pension savings market - both defined contribution and
defined benefit - together with a more efficient annuity market resulting in less
means-tested benefits and a higher tax take. The emerging capital market in
longevity-linked instruments can get help to kick start market participation through
the establishment of reliable longevity indices and key price points on the longevity
risk term structure and can build on this term structure with liquid longevity
derivatives.

An earlier version was presented at ‘Risk Sharing in Defined Contribution Pension
Schemes’, Department for Work and Pensions and Netspar Conference, University of
Exeter, 7-8 January 2010