Longevity Hedging Demystified: 12 Key Facts for Trustees | Insight Investment

Trustees face uncertain life expectancy trends and longevity is often the largest unhedged risk for schemes. Targeted longevity hedging, supported by competitive pricing and deep capacity, can improve endgame certainty with minimal funding impact and implementation flexibility.

What you need to know

• Longevity is the biggest unhedged risk for most pension schemes, warranting focused risk management action.
• Life expectancy may not continue falling; medical advances and policy could increase longevity, raising liability uncertainty.
• Market depth has expanded; multiple highly rated reinsurers and intermediated structures support sizeable, targeted longevity swaps.
• Pricing has fallen to historic lows and typical funding impacts are small, improving implementation feasibility for trustees.
• Hedges can cover deferred members, be collateralised with eligible assets, and preserve buy-out or run-on options.

Why longevity risk matters for DB schemes

UK life expectancy at 65 has fallen substantially in recent years. However, it may not continue to fall; medicines and policy could increase life expectancy. Longevity risk is the biggest unhedged risk for most pension schemes. For defined benefit pension schemes, this uncertainty threatens endgame certainty.

How longevity hedging works in practice

A longevity swap exchanges pre‑agreed inflation‑linked fixed cashflows for floating payments matching actual pensions. In practice, an insurer intermediates the transaction between the scheme and the reinsurer. Hedges can target specific populations and cover pensioners and deferred members. Targeting improves hedge efficiency and governance.

Market depth, pricing and funding

Total longevity‑hedging volumes have exceeded £120bn, and multiple highly rated reinsurers compete for risk. Pricing has fallen to historic lows in recent years, reflecting competition and higher interest rates. The additional investment returns required to fund a hedge are typically small, aiding feasibility.

Figure 1: Lower risk fees reduce funding drag and support timely implementation of longevity hedging

Collateral management and endgame flexibility

Longevity swaps can be collateralised with eligible assets including cash, gilts, supranational and agency debt, and corporate bonds. Hedges are compatible with buy‑out or run‑on endgame strategies, preserving future flexibility. This supports practical implementation and transition planning.

Conclusion

Longevity hedging allows schemes to convert uncertain cashflows into defined profiles while retaining strategic flexibility. Lower pricing, deep counterparties and eligible collateral broaden implementation routes. Portfolios can reduce unhedged liability risk and support endgame planning without materially increasing funding strain.