The mortality risk of pensions – methods of control and policy implications for the UK

Purpose - Bodies with responsibilities for paying pensions to individuals face a mortality risk in that the pensioners may prove longer lived than expected. The significant scale and uncertainity of this risk is becoming increasingly clear. Various measures are available to control this risk and new innovations such as mortality linked bonds and derivatives have been proposed. The purpose of this paper is to evaluate the alternative methods of controlling morality risk and discuss their potential policy implications. Design/methodology/approach - The paper considers the various parties affected by mortaling risk and assesses the difficulties of predicting mortality. Different methods of predicting mortality are discussed. Policy issues are considered and conclusions presented. Findings - There is a huge demand for methods of hedging and trading mortality risk. Financial markets are responding to this with a number of insurers moving into the bulk annuity market. New products, such as survivor bands and mortality derivatives, are just appearing in the market, it is still to be seen whether this major financial problem will be best be solved by the financial markets or by government intervention. Originality/value - The paper offers an evaluation of the alternative methods of controlling mortality risk together with the potential policy implications.