Guernsey Pension Funds: Hedging Longevity Risk

Pension funds that operate defined benefit schemes are exposed to longevity risk; the risk that their pensioners live longer than predicted.
Their exposure has been growing rapidly in recent years as life expectancy has increased - just one extra year of additional life expectancy can add 5% to a pension fund's total liabilities.

One solution to this issue is for pension funds to transfer longevity risk to the reinsurance market. Such a transfer can be attractive for both parties.

From the pension fund's perspective, a life reinsurer is often an attractive counterparty, both because of its deep understanding of the nature of the risk being transferred, and because it can provide a balance sheet big enough to assume a meaningful amount of risk from the fund.