Given the size of the UK government’s borrowing requirement – £703bn (€820bn, $1,142bn) over the next five years – and also the growing need for pension funds and annuity providers to hedge against people living longer, there is an urgent need for the government to issue longevity bonds. These would have payments linked to the future survival rate of a specified cohort of the population, say 65-year-old males in 2010.

Dramatic increases in life expectancy have left private sector pension funds and annuity providers with a massive longevity exposure, and unlike other risks such as credit or interest rate risk, there are few options available to hedge this risk on any significant scale within the private sector. In addition, annuity demand is increasing as a consequence of the growth in defined contribution plans. There is also an increased demand from defined benefit schemes to use annuities to back pensions in payment and scheme buy-outs.