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DISCUSSION PAPER PI-1002

Sharing Longevity Risk: Why Governments Should Issue Longevity Bonds

David Blake, Tom Boardman and Andrew Cairns

Government-issued longevity bonds would allow longevity risk to be shared
efficiently and fairly between generations. In exchange for paying a longevity risk
premium, the current generation of retirees can look to future generations to hedge
their systematic longevity risk. Longevity bonds will lead to a more secure pension
savings market, together with a more efficient annuity market. By issuing longevity
bonds, governments can aid the establishment of reliable longevity indices and key
price points on the longevity risk term structure and help the emerging capital market
in longevity-linked instruments to build on this term structure with liquid longevity
derivatives.

Key words: Longevity risk, longevity bonds, public policy, political economy

An earlier version was presented at ‘Risk Sharing in Defined Contribution Pension
Schemes’, Department for Work and Pensions and Netspar Conference, University of
Exeter, 7-8 January 2010