Center for Retirement Research Argues for Use of Longevity Bonds

The Center for Retirement Research at Boston College released Tuesday, June 8, a new issue brief that makes the case for so-called longevity bonds. The brief, written by authors affiliated with the Pensions Institute, Cass Business School at City University of London, makes the case for longevity bonds as instruments that would allow financial institutions to hedge aggregate longevity risk.

According to the brief, insurance companies and defined benefit pension plans face the risk that retirees might live longer than expected. This risk might adversely affect both the willingness and ability of financial institutions to supply retired households with financial products to manage their wealth decumulation.

Longevity bonds, it explains, which involve no repayment of principal, would pay a coupon that is linked to the survivorship of a cohort, say, 65-year-old males born in 1945. If a higher-than-expected proportion of this cohort survived to age 75 – a development that would cost the insurance company or pension plan more than expected – the coupon rate would increase, offsetting some of the provider’s cost.