Factors for a successful market in longevity-indexed government bonds: A public debt management perspective

Abstract

This paper reviews various ways of reducing the exposure of pension funds and annuity providers to longevity risk. Based on this review, the prospects for capital market solutions by the private sector are assessed. The paper identifies a number of key obstacles to explain why a large-scale private-sector driven market in longevity products is unlikely to develop in the near future. Using these findings, the paper considers central public policy with regard to whether the government can play a significant capital market role in overcoming these hindrances. The paper argues that this public policy role is hampered by the fact that governments themselves are already exposed to significant longevity risk. This means that issuing longevity-indexed government bonds (LIBs) would further increase their current exposure. Against this backdrop, the issuance criteria commonly used by public debt managers for launching new instruments such as LIBs are identified. On this basis, the paper concludes that the prospects for a successful, large-scale market in LIBs do not seem favourable at this stage. It is also doubtful whether relatively small government issues of LIBs would suffice to create a benchmark around which large-scale capital-market solutions by the private sector could develop.