Longevity Securitisation and Capital Market Solutions for Pension System Risk in Nigeria

This study develops original theoretical models and empirical analysis for longevity securitisation as a capital market solution for managing systematic longevity risk in Nigeria's pension system. As Nigeria's contributory pension scheme matures and the population of retirees drawing down savings grows, systematic longevity risk, the risk that aggregate life expectancy improves beyond pricing assumptions, becomes a material financial threat to pension fund administrators and annuity providers. This study draws on the theoretical frameworks of longevity swap valuation, mortality-linked bond design, and risk-neutral longevity pricing to develop longevity risk transfer instruments calibrated to Nigerian demographic data. A two-factor stochastic mortality model is estimated from Nigerian mortality time series, with parameter uncertainty explicitly modelled. Longevity swap and longevity bond term structures are derived, and fair-value premiums are computed for representative Nigerian pension fund longevity exposures. Market feasibility is assessed through an analysis of potential investor demand, regulatory barriers, and structural considerations for a Nigerian sovereign longevity bond. Findings establish that fair-value longevity swap premiums for Nigerian pension fund exposures are below comparable international benchmarks due to lower baseline longevity risk, but parameter uncertainty premiums are higher due to data scarcity. A sovereign longevity bond of approximately 200 billion naira is estimated to be sufficient to transfer the longevity tail risk of the top five PFAs. The study contributes an original Nigerian longevity securitisation framework and recommends that PENCOM, NAICOM, and the DMO jointly explore sovereign longevity bond issuance.

Keywords: longevity securitisation, systematic longevity risk, pension system, mortality modelling, Nigeria.