We compare two contracts for managing systematic longevity risk in retirement: a collective arrangement that distributes the risk among participants, and a marketprovided annuity contract. We evaluate the contracts’ appeal with respect to the retiree’s welfare, and the viability of the market solution through the financial reward to the annuity provider’s equityholders. We find that individuals prefer to bear the risk under a collective arrangement than to insure it with a life insurers’annuity contract subject to insolvency risk (albeit small). Under realistic capital provision hypotheses, the annuity provider is incapable of adequately compensating its equityholders for bearing systematic longevity risk.

Systematic longevity risk is a looming threat to pension systems worldwide. Inncontrast to idiosyncratic longevity risk, which is the risk surrounding an individual’s actual date of death given known survival probabilities, systematic longevity risk concerns the misestimation of future survival probabilities. The persistent trend towards improved life expectancy and the increased uncertainty in mortality developments make it clear that systematic longevity risk can be distressful for retirement financing, especially since longevity-linked assets are not yet commonplace …