The study presents a dynamic longevity hedging framework designed for Group Self-Annuity (GSA) funds, aiming to stabilize retirement payouts by continuously adjusting hedge positions over time instead of relying on static protection. Using England and Wales mortality data, the authors calibrate their model through the Augmented Common Factor (ACF) mortality approach, which enhances forecast accuracy and accounts for population-basis risk.
A key finding reveals that q-forwards mortality-linked instruments can reduce payout volatility by over 90% during the early years of retirement when structured optimally. This means retirees in GSA funds can experience significantly more predictable benefits, with reduced exposure to unexpected longevity improvements.
Importantly, the framework manages a careful trade-off between two key outcomes:
- Variance reduction — minimizing fluctuations in payouts
- Mean cost — accounting for the slight reduction in expected benefits due to hedging expenses or risk premiums
The analysis further shows that members with higher risk aversion are inclined toward stronger hedge positions, accepting a marginal decrease in expected payouts for enhanced stability. The model remains robust across different conditions, including varying forward maturities, reference populations, and interest rate environments.
Published on: 03 October 2025
