Pension fund longevity risk is becoming increasingly important. Longevity indices would allow the creation of liquid derivatives that could be used to hedge this risk. However, there are a number of criteria that such indices would need to fulfil to provide an optimal solution, as well as a number of forms that the derivatives could take. These features are discussed, together with the characteristics of some existing longevity indices.
Longevity indices look like a viable risk management instrument, but given their utility bounded by liquidity and granularity, they are anything but trivial to design. Add to the mix an extremely fragmented market like the Swiss with its many small IORPs and their high volatility risk. Longevity risk also comprises level risk, trend risk and catastrophe risk. Interestingly, catastrophe risk is only seen as a one-off surge in mortality rates: "similar one-off falls in mortality rates do not occur." Black swans, anyone?