A new and developing class of special financial instruments enabling two parties to exchange payments depending upon the mortality rates of a particular population. This enables pension funds to partially or wholly hedge their longevity risk without having to purchase Annuities. The instruments are arranged by investment banks and structured in a similar way to interest rate swaps.

For example, the pension fund receives a series of variable payments that reflect ‘actual’ mortality patterns, in exchange for paying a series of fixed payments to the counter-party. This arrangement is designed to provide certainty to the pension fund. The effectiveness of any such hedge, however, will depend upon the terms of the swap, including what the ‘actual’ mortality rates are based on and the duration of the swap.