It was my understanding that the swap counterparty would pay the matching payments until the last covered pensioner died. But it appears not to be the case! Payments would be exchanged during the swap term, e.g. 25 years. If a pensioner lives longer than 25 years, payments due after 25 years will fall back to the scheme. There is a basis risk here, am I correct? Also, a swap agreement would be agreed on a bulk basis, not individually priced (can't see how they can do it on an individual basis anyway!). I wonder how the fixed and matching payments are calculated. Are they based on the total pension amount in payment at the beginning of the year, e.g. pension payment at year start x qx? or some sort of standardised amount agreed upfront by both parties? Is there a basis risk here too? Many thanks!
Hi Quang This is a rapidly developing area and I suspect other users of the forum will have more direct experience than I have. However, I believe that in practice there are all sorts of ways of structuring the swap. In particular, I think swaps can be based on either: - the longevity of the actual pension scheme population - a longevity index. Many consultancies have published articles about longevity swaps (Google "longevity swap") and the Profession has published slides on its website from those who have delivered presentations about longevity swaps at actuarial conferences. These two might be a reasonable place to start: http://www.actuaries.org.uk/research-and-resources/documents/longevity-management-1 http://www.actuaries.org.uk/research-and-resources/documents/longevity-de-risking-action I hope this helps
