Survivor Bonds: Helping to Hedge Mortality Risk
David Blake and William Burrows
Pensions Institute, Birkbeck College
One of the key problems facing annuity providers is mortality risk, the risk of underestimating mortality improvements. The authors argue that the government could help the issuers of annuities to hedge aggregate mortality risk by introducing a new type of bond, which the authors call a survivor bond. The future coupons on this bond depend on the percentage of the population of retirement age on the issue date who are still alive on the future coupon payment dates. The coupons on the bond therefore decline over time but continue in payment until the last members of this population cohort have died. The government would therefore be assuming a risk that has hitherto been borne by the private sector. However, governments now issue inflation-indexed bonds, and the authors would argue that inflation risk is a much greater risk than mortality risk in aggregate. Futhermore, governments directly contribute to mortality risk: for example, they promote public health campaigns that, if successful, lead to mortality improvements that are difficult to predict many years ahead. Survivor bonds enable pension provision to be a shared responsibility between the public and the private sectors.