Pensions & Investments reported that more and more funds in the United Kingdom are using longevity swap trades to hedge their pension payout risk. This product was first traded in 2009 and, in 2011, had a notional amount of $10.7 billion in contracts traded. Pension funds are guarding against retirees living longer than their actuarial predictions where they would be responsible for extra payments. The companies selling this risk include insurance companies such as Swiss Re, Prudential Financial Incorporated and Legal & General Group and investment banks such as Goldman Sachs, Deutsche Bank, JP Morgan Chase and Credit Suisse.
The swap trades are easier for pension funds to execute than other hedging vehicles known as buy-ins or buy-outs. These transactions also transfer the pension payout risk but need large upfront payments. Sometimes, the institutions have to sell assets to afford the payments.
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