Can Pension Funds Partially Manage Longevity Risk by Investing in a Longevity Megafund?

Abstract

Abstract:Pension funds, which manage the financing of a large share of global retirement schemes, need to invest their assets in a diversified manner and over long durations while managing interest rate and longevity risks. In recent years, a new type of investment has emerged, that we call a longevity megafund, which invests in clinical trials for solutions against lifespan-limiting diseases and provides returns positively correlated with longevity. After describing ongoing biomedical developments against ageing-related diseases, we model the needed capital for pension funds to face longevity risk and find that it is far above current practices. After investigating the financial returns of pharmaceutical developments, we estimate the returns of a longevity megafund. Combined, our models indicate that investing in a longevity megafund is an appropriate method to significantly reduce longevity risk and the associated economic capital need.