| This summary sets out 12 practical facts on longevity hedging for defined benefit pension schemes, spanning life expectancy trends, risk exposures, swap design, market capacity, pricing, collateral, and endgame flexibility. It distils how trustees can understand, structure, and implement longevity risk transfer while preserving optionality. |  |
- Longevity dominates unhedged risk: For many schemes, unhedged longevity risk represents the largest residual exposure, outweighing interest rate, inflation and growth asset risks.
- Life expectancy uncertainty persists: UK life expectancy at 65 has fallen in recent years but could rise again due to medicines, policy or other factors, keeping longevity risk material.
- Market depth and pricing: Publicly disclosed longevity transactions have exceeded £120bn, and indicative risk fees have fallen to historic lows in recent years.
- Design flexibility: Longevity swaps can target pensioners and deferred members, with broad eligible collateral, allowing schemes to tailor coverage and governance.
- Endgame optionality: Longevity hedges can be compatible with buy-out or run-on strategies, supporting future decision-making.
UK life expectancy dynamics and why they matter
Life expectancy at 65 in the UK has fallen substantially in recent years, a trend that has reduced scheme liabilities for some but also introduced uncertainty around underlying mortality improvements. The path forward is not assured; new medicines for cancer and dementia, life extension technologies, or shifts in government policy could increase life expectancy. For trustees, this volatility underscores why longevity risk remains a strategic consideration: scheme outcomes can deviate meaningfully if mortality trends differ from assumptions, affecting funding levels and endgame timelines.
Figure 1: UK life expectancy at 65 has fallen substantially over recent years
Longevity as the largest unhedged risk in DB schemes
Across many defined benefit pension schemes, longevity risk is the biggest unhedged exposure relative to other drivers such as rate and inflation risk or growth asset risk. This reflects the fact that interest rate and inflation exposures are often hedged, leaving longevity as the dominant residual factor. At the same time, market activity has accelerated: publicly disclosed longevity-hedging transactions have surged to over £120bn in recent years, indicating both depth and maturing execution channels. For trustees, this combination—material unhedged risk and active market capacity—supports evaluating hedging as part of risk management planning.
Figure 2: Longevity is the biggest unhedged risk for most pension schemes
Figure 3: Total longevity-hedging transaction volumes have surged to over £120bn in recent years
How a longevity swap works and what can be hedged
A longevity swap exchanges pre-agreed, inflation-linked fixed cashflows for floating payments linked to the actual pensions due to members, effectively transferring the longevity risk to a counterparty (typically intermediated by an insurer). Structures can be targeted to specific subsets of the membership—such as pensioners, deferred members, or bespoke cohorts—allowing a tailored hedge against the scheme’s mortality profile and cashflow timing. Trustees can calibrate coverage levels, member segments, and indexation features to align with scheme needs, reducing basis risk while maintaining governance control.
Figure 4: The principles behind a longevity swap are simple in theory and practice
Counterparties and pricing conditions
Multiple well-regarded reinsurers with strong long-term financial strength ratings compete to take on pension schemes’ longevity risk, bolstering execution certainty and pricing tension. Recent market dynamics—more competition and a higher-rate environment—have contributed to longevity hedge pricing falling to historic lows in recent years, as indicated by external market methodologies that aggregate input from 25+ insurers and reinsurers. Pricing is typically expressed as a risk fee, reflecting the cost of transferring longevity risk and the intermediary structure. Trustees should consider price transparency, collateral terms, and basis risk when assessing quotations.
Figure 5: Multiple well-regarded reinsurers compete to take on pension schemes’ longevity risk
Figure 6: Longevity hedge pricing has fallen to historic lows in recent years
Funding impact and collateral mechanics
The additional required investment return to fund a longevity hedge is typically small relative to the overall portfolio, with stylised examples indicating modest basis points per annum depending on fee and risk assumptions. Longevity swaps can be collateralised using a broad range of eligible assets—cash, gilts, supranational and agency debt, and corporate bonds—enabling integration with existing treasury and governance processes. Collateral terms, thresholds, and asset eligibility should be aligned to liquidity management and stewardship of scheme assets to avoid unintended funding frictions.
Figure 7: Longevity swaps can be collateralised with a wide range of eligible assets
Endgame strategies: buy-out and run-on flexibility
Longevity hedges provide future flexibility suitable for a range of endgame strategies. Whether aiming for buy-out or run-on, hedging can help stabilise outcomes by reducing sensitivity to mortality experience. For trustees, this can support sequencing decisions, such as the timing of de-risking steps, engagement with insurers, or retention strategies, without locking in an irreversible path. Contract terms should be evaluated for portability and alignment with the intended endgame journey.
