BWCI
Senior Manager of Actuarial Insurance Graydon Bennett
discusses the ins and outs of longevity swaps.
Increases in life expectancy are a source of risk and
uncertainty for trustees of defined benefit pension schemes. Over
the last decade, a number of structures for managing this longevity
risk have emerged, including the pension buy-in, the pension
buy-out, and the most recent innovation - the longevity swap.
Structure of a longevity swap
The objective of a longevity swap is to allow the pension scheme
to exchange a stream of uncertain future pension payments for the
security of a known series of future payments.
The pension scheme enters into an agreement to transfer its
longevity risk using a swap with fixed and floating legs. It does
this by exchanging a commitment to make future fixed payments
(based on estimated future pension payments) in return for another
party's commitment to meet the uncertain actual future payments
(the floating leg).
