I understand the concept of Longevity Swaps i.e. a series of fixed payments from the Pension Plan to a swap provider in return for payments from the provider to the plan which will depend on the longevity experience of a particular set of lives. In the notes it says that these payments from the swap provider can be based on a published longevity index. I don't understand the benefit of this? How is this any different to funding the Plan on a mortality table similar to the longevity index, there will be still gains and losses against the Longevity index, so how does this mitigate longevity risk anymore than adopting a prudent mortality table for funding purposes?
You're right - it's not perfect. We're reducing longevity risk (people living longer) ... as the longevity of the population is a (good?) proxy for the longevity of the pension scheme members ... ...but introducing basis risk (the risk that the members live longer than the index). Arguably though, the second risk may be less significant than the first.
