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SM Bonds—A New Product for Managing Longevity Risk

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  • Piet de Jong
  • Shauna Ferris

Abstract

A new type of retirement bond is proposed called an SM bond. SM bonds are long dated government bonds divisible into two parts: a survivorship (S) part and a mortality (M) part. Each SM bond is associated with a particular age. SM bonds associated with a particular age are only purchasable by (originators) of that age. The SM bond is then splittable into an S and M component. The S part must be retained by the originator, who receives the face value of the bond if he/she is alive at maturity. For originators who die prior to the maturity date, the maturity value of the SM bond is assigned to a mortality pool. The holder of the M part of the bond receives the annual bond coupon, and at maturity a pro rata share of the mortality pool. M bonds are tradable: holders can sell their M bonds to anyone, at any time. It is envisaged different age bonds are issued every year for ages say 30–64 each with say a 35‐year term. The market will be regularly informed about the mortality experience, and the market price of the M bonds will vary over time to reflect that experience.

Suggested Citation

  • Piet de Jong & Shauna Ferris, 2019. "SM Bonds—A New Product for Managing Longevity Risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(1), pages 121-149, March.
    • Handle: RePEc:bla:jrinsu:v:86:y:2019:i:1:p:121-149
    DOI: 10.1111/jori.12203
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