Longevity finance products for protection against longevity risk.
There are two kinds of longevity risk: one person outliving their savings, and a whole population living longer than the insurers and pension schemes assumed. Different products address each. For individuals, annuities and pensions transfer the risk fully, investment products with a guaranteed floor transfer part of it, and ordinary investments transfer none. For pension schemes and insurers, buyouts transfer everything, buy-ins transfer the payments, and longevity swaps transfer only the longevity part — usually to a handful of global reinsurers who hold the end of the chain.
Longevity risk comes in two forms and the products that protect against it are ranked here by how much of each they transfer and to whom. For an individual, who faces idiosyncratic risk — outliving their own money — the ranking is: lifetime and deferred income annuities and defined-benefit pensions (full transfer to a pool), guaranteed-withdrawal riders (transfer at the floor), collective schemes (shared, not transferred), and unpooled investments (no transfer). For an institution facing aggregate risk — a whole population outliving the mortality table — the ranking is: a pension buyout (full transfer of assets and liabilities to an insurer), a buy-in (the insurer pays the pensions, the scheme keeps the liability), a longevity swap (only the longevity component is transferred, usually to a reinsurer), and longevity bonds and indices (hedges that exist mostly on paper). The chain matters: an individual's annuity transfers risk to an insurer, which transfers the aggregate part to a reinsurer, and somebody always holds the end of it — which is why the strength of the institution is part of every product. Which product fits belongs with a licensed adviser or, for institutions, an actuary.
- Individual longevity risk is poolable and can be removed; aggregate longevity risk is systematic and can only be moved along a chain, never eliminated.
- For an individual, transfer is complete only where a payment stops at death; every product ranks by how completely it does that.
- For an institution, a buyout transfers everything, a buy-in transfers the payments but not the liability, and a swap transfers only the longevity component.
- The end of the chain is a small number of global reinsurers; the protection an individual buys is only as strong as that chain.
- Capital-market longevity hedges — bonds, indices, derivatives — exist mostly in theory; the traded market remains thin.
Products for individual longevity risk, ranked
Ranked on: how completely each product transfers an individual's risk of outliving their money to a pool, and to whom. Complete transfer ranks highest; products that pool nothing rank last.
| # | Option | Verdict | Grade |
|---|---|---|---|
| 1 | Lifetime income annuity | Complete transfer to an insurer, from purchase | GRADE AEstablished |
| 2 | Deferred income annuity | Complete transfer of the tail, cheaply | GRADE AEstablished |
| 3 | Defined-benefit or state pension | Complete transfer to a scheme or a government | GRADE AEstablished |
| 4 | Guaranteed-withdrawal rider | Transfer at the floor only | GRADE BPromising |
| 5 | Collective or pooled scheme, tontine-style arrangement | Shared among members, not transferred | GRADE BPromising |
| 6 | Drawdown, bond ladder, dividend portfolio | No transfer | GRADE DInsufficient or unsafe |
- 01
Lifetime income annuity
GRADE AEstablishedComplete transfer to an insurer, from purchasePayments continue for life and stop at death; the individual's longevity risk passes entirely to the insurer's pool for the income bought. The insurer, in turn, holds the aggregate risk and typically passes part of it to a reinsurer. Gives up the capital and, unless indexed, purchasing power.
- 02
Deferred income annuity
GRADE AEstablishedComplete transfer of the tail, cheaplyTransfers the risk of the years past an advanced age for a small premium. The individual keeps the risk before the start date — deliberately, since the portfolio funds those years — and none after it. The most efficient transfer per unit of premium.
- 03
Defined-benefit or state pension
GRADE AEstablishedComplete transfer to a scheme or a governmentThe individual's risk sits with the scheme's sponsor or the state, which in turn may transfer it onward — schemes through buy-ins, buyouts and swaps; states by revising rules. For the individual the transfer is complete for the income promised.
- 04
Guaranteed-withdrawal rider
GRADE BPromisingTransfer at the floor onlyThe insurer takes the longevity risk on the guaranteed withdrawal; the individual keeps the risk on everything above it and pays a recurring fee for the part transferred.
- 05
Collective or pooled scheme, tontine-style arrangement
GRADE BPromisingShared among members, not transferredMembers pool their idiosyncratic risk with each other rather than with an insurer, which removes the risk of an individual pot running dry but leaves the amount to vary with the pool's experience — and leaves the aggregate risk inside the pool, since there is no insurer to pass it to. Available in some jurisdictions only.
- 06
Drawdown, bond ladder, dividend portfolio
GRADE DInsufficient or unsafeNo transferNothing is pooled; the individual holds the entire risk. Useful for the flexible layer of a plan, and irrelevant to protection against longevity risk.
Products for aggregate longevity risk, ranked
Ranked on: how much of a pension scheme's or insurer's aggregate longevity risk each instrument transfers, and how completely it removes the liability from the balance sheet. These are institutional products; they are ranked here because they are the other end of the chain every individual product joins.
| # | Option | Verdict | Grade |
|---|---|---|---|
| 1 | Pension buyout | Full transfer of assets and liabilities to an insurer | GRADE AEstablished |
| 2 | Pension buy-in | The insurer pays the pensions; the scheme keeps the liability | GRADE BPromising |
| 3 | Longevity swap | Only the longevity component is transferred | GRADE BPromising |
| 4 | Reinsurance of annuity or pension longevity | The end of the chain | GRADE BPromising |
| 5 | Longevity bonds, indices and derivatives | Hedges that exist mostly on paper | GRADE CEarly |
- 01
Pension buyout
GRADE AEstablishedFull transfer of assets and liabilities to an insurerThe scheme pays a premium and the insurer takes on the members' pensions in full; the liability leaves the sponsor's balance sheet and members become the insurer's policyholders. The most complete transfer available, and the most expensive. Members' protection then rests on the insurer and the guarantee scheme.
- 02
Pension buy-in
GRADE BPromisingThe insurer pays the pensions; the scheme keeps the liabilityThe scheme buys a bulk annuity that pays the members' pensions as they fall due, but retains the liability and the members. Longevity and investment risk on the covered members are transferred; the balance-sheet obligation is not. Often a step toward a later buyout.
- 03
Longevity swap
GRADE BPromisingOnly the longevity component is transferredThe scheme pays a fixed series based on expected mortality and receives the actual amounts owed as members live longer or shorter than expected; the counterparty — usually a reinsurer via an insurer or bank — takes the longevity risk alone. Investment risk and the liability stay with the scheme. Capital-efficient and increasingly common for large schemes.
- 04
Reinsurance of annuity or pension longevity
GRADE BPromisingThe end of the chainInsurers pass part of the aggregate longevity risk they have accepted from individuals and schemes to reinsurers, a small number of which sit at the end of the global chain. It is where the risk that cannot be pooled away finally rests. Ranked B for the insurer's balance sheet; for the system it is the concentration to watch.
- 05
Longevity bonds, indices and derivatives
GRADE CEarlyHedges that exist mostly on paperCapital-market instruments designed to pay out as population longevity exceeds an index have been proposed and occasionally issued, but the traded market remains thin and most attempts have not scaled. A theoretical means of spreading aggregate risk beyond insurers and reinsurers; not yet a practical product.
The chain, from individual to reinsurer
| Holder of the risk | Product that moves it onward | What moves | What stays |
|---|---|---|---|
| Individual | Lifetime or deferred annuity; pension membership | Idiosyncratic longevity risk, fully | Inflation, unless indexed; institution risk |
| Pension scheme | Buy-in, buyout, longevity swap | Aggregate longevity (and, in a buyout, investment) risk | In a buy-in or swap: the liability and the members |
| Insurer | Reinsurance treaty | Part of the aggregate longevity risk | The rest, and the policyholder relationship |
| Reinsurer | Retrocession; capital-market hedge (rarely) | A little, sometimes | Almost all of it — the end of the chain |
Frequently asked questions
Which products protect against longevity risk?
For individuals: lifetime and deferred income annuities and defined-benefit or state pensions transfer the risk completely; guaranteed-withdrawal riders transfer it at the floor; collective schemes share it among members; unpooled investments transfer none. For institutions facing aggregate risk: a pension buyout transfers everything, a buy-in transfers the payments, a longevity swap transfers only the longevity component, and reinsurance is where the chain ends.
What is the difference between individual and aggregate longevity risk?
Individual risk is one person outliving their own money; it is idiosyncratic and can be pooled away, which is what annuities and pensions do. Aggregate risk is a whole population outliving the mortality table an insurer or scheme priced against; it is systematic, cannot be diversified by adding people, and can only be transferred along a chain — scheme to insurer to reinsurer — never eliminated.
What is a longevity swap?
An institutional contract in which a pension scheme pays a fixed series based on expected mortality and receives the actual amounts owed as members live longer or shorter than expected, so that only the longevity component of its risk passes to the counterparty, usually a reinsurer. Investment risk and the liability stay with the scheme. It is capital-efficient and common for large schemes; it is not an individual product.
What is the difference between a pension buy-in and a buyout?
In a buy-in the scheme buys a bulk annuity that pays members' pensions as they fall due but keeps the liability and the members; longevity and investment risk on the covered members move to the insurer, the balance-sheet obligation does not. In a buyout the insurer takes on the pensions in full, the liability leaves the sponsor, and members become the insurer's policyholders. A buyout transfers more and costs more.
Who ultimately holds longevity risk?
A small number of global reinsurers, at the end of a chain that runs from individuals to insurers and pension schemes to reinsurers. Aggregate longevity risk cannot be pooled away, only moved, so someone always holds the end of it. For an individual buying an annuity, the strength of that chain and of the guarantee scheme where they live is part of the protection being bought.
Can longevity risk be hedged in the capital markets?
In theory, through longevity bonds, indices and derivatives that pay out as population longevity exceeds an index. In practice the traded market remains thin and most attempts have not scaled, so these rank as hedges that exist mostly on paper. Insurers and reinsurers remain the practical end of the chain.
Keep reading
- Longevity financial products
The full explainer: the two longevity risks, the mortality credit and pension risk transfer.
- Which longevity finance products protect against outliving savings?
The individual products, with the one-question test for pooling.
- Best longevity insurance with low fees and strong guarantees
Why the strength of the institution is part of every product.
- Public health and policy
How governments carry and reshape their share of aggregate longevity risk.
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