Understanding longevity bonds

One of the major concerns of pension funds is the management of longevity risk. A new financial-actuarial asset called the longevity bond seems to present a solution to this problem. We investigate the power of such an instrument and show the role it can play in a pension fund portfolio. By Francesco Menoncin


In November 2004, the European Investment Bank (EIB) unveiled plans to issue the first longevity bond aimed at offering a partial longevity risk hedge to UK pension schemes and life insurers. Unfortunately, to our knowledge, the longevity bond has been first actively marketed but then withdrawn because of a lack of demand (some possible explanations are listed in Cairns et al., 2005).

The (25-year time to maturity) longevity bond was structured with coupons given by the product

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