The Motley Fool Previous Page

This Investment Will Absolutely Kill You

Dan Caplinger
May 18, 2011

Wall Street made millions creating ways for investors to bet on the death of the housing market. Now, they want to go even further: They want to bet on your death.

No, big banks Goldman Sachs (NYSE: GS  ) , JPMorgan Chase (NYSE: JPM  ) , and Deutsche Bank (NYSE: DB  ) don't have it in for you personally -- or if they do, it's not because of anything I know about. What they do want to accomplish, though, is to help pension funds deal with one of the biggest risks they face right now: the possibility that retired workers end up living longer than expected, which could lead to gross underestimations of the amount of money that pension funds need to set aside in order to cover their eventual payouts.

Dealing with longevity risk
Living longer than your life expectancy seems like an unqualified positive. But it does raise financial concerns, as you obviously need more money in order to cover living expenses for longer periods of time. When you consider that some pension funds have some $23 trillion in assets and collectively cover hundreds of millions of workers, you can see how the problem is magnified for these large institutions.

Ideally, what the group of big banks, which also includes Morgan Stanley (NYSE: MS  ) , Credit Suisse (NYSE: CS  ) , and UBS (NYSE: UBS  ) , want to do is find investors who are willing to take on some of this longevity risk. Right now, insurance companies like Prudential plc have allowed some companies to buy longevity risk insurance. But concerns about regulation as well as capacity issues have led big banks to seek out broader markets.

True long-term investing
One challenge in getting investors to buy longevity risk products is that in a climate where short-term quarterly results and quick returns are essential, bets on longevity by definition take decades to sort themselves out. As a result, making a market for longevity-based securities liquid and tradable is essential to attract investor interest. Otherwise, an investor could easily get stuck in such instruments indefinitely.

In addition, any financial relationship that could last dozens of years raises questions of counterparty risk. Essentially, any pension fund using insurance companies to hedge longevity risk has to hope that it won't go the way of