The Life & Longevity Markets Association (LLMA) and Institute and Faculty of Actuaries has called for proposals for a research project to develop an industry benchmark for understanding longevity basis risk.

The two associations want to develop a methodology to quantify the basis risk arising from using population level mortality indices which can be used to manage longevity risk. They expect the research to be beneficial to pension schemes and their members as well as insurance companies writing annuity business.

Institute and Faculty of Actuaries policy manager Sarah Mathieson said: “In the context of a longevity hedge, longevity basis risk is the potential mismatch between the behaviour of the longevity hedge and the portfolio of pensioners or annuitants being hedged, when the hedge has been based on a generic mortality index rather than the actual pool of lives in the pension scheme or annuity book. This project aims to develop a methodology to quantify the risk, which we believe will benefit a range of parties involved in pensions, from scheme sponsors to scheme members, as well as writers of annuity business.”

LLMA spokesperson Dan Ryan added: “The LLMA believes that this project will help to develop market clarity and support the LLMA’s brief to grow this marketplace. It is a high profile opportunity for the successful party to provide a practical solution to a real industry problem and in doing so greatly enhance opportunities for longevity risk transfer to the capital markets.”

Proposals for the project can be sent in until 15 April 2013, with the research work to be completed within 12-18 months. The successful party will be accountable to the Longevity Basis Risk Working Group, who will closely monitor the progress of the research to ensure that it continues to lead to the desired outcome.

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