Governments and the Market for Longevity-indexed Bonds

Abstract

Uncertainty about length of life, longevity risk, is a growing financial problem for pension funds and annuity providers. Unfortunately, there is a lack of financial instruments to hedge against this longevity risk, thereby complicating risk management by pension funds and hindering the expansion of the annuity market. Consequently, this paper examines the role of government in promoting a private market solution for longevity hedging financial products. Governments could in principle improve the market for annuities by issuing longevity-indexed bonds and by producing a longevity index. The paper argues that the first public policy role is hampered by the fact that governments are themselves already exposed to significant longevity risk. However, governments could take other steps such as producing a reliable longevity index.