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Hedging is a broad concept that involves using opposite exposures to a risk to reduce the effects of that risk.

In the context of longevity risk held by a pension plan, this is usually achieved by entering into a contract that has the risk characteristics that offset the longevity risk within the plan.

For example, a longevity swap is a product that could be used to hedge a pension plan’s longevity risk: a plan would ordinarily lose out if participants were living longer, as their benefit payments would need to be paid for longer. However, the plan would gain from a longevity swap as the payments it was receiving under the swap would also continue for longer if its participants were living for longer. The overall effect would be to reduce or eliminate the impact of participants living longer.

Keep exploring our Lexicon of Longevity
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