UK - The governor of the Bank of England, Mervyn King, has suggested that the government issue longevity bonds to help annuity providers to hedge longevity risk.

Actuaries welcomed the move but warned it could shift risk and costs on to future taxpayers.

King's suggestion came as Ewen Cameron Watt, head of investment strategy and research at Merrill Lynch Investment Managers, warned that institutions were buying long-dated government and corporate bonds "irrespective of price" due to the change in pension liabilities.

"What are the risks incurred in pension provision and how should they be shared among us?" King said, adding that "risk is at the heart of the issue".

Speaking at the British Academy Annual Lecture, the central bank governor said the government could issue its own longevity bonds. "Private annuity providers could use them to hedge aggregate longevity risk."

He added: "By assuming longevity risk the government would make it possible for the private sector to purchase such bonds and in turn support a private market in annuities."

Longevity bonds would be an alternative to other risk-sharing methods such as collective schemes and combining taxes on current employees with deficit finance.

He added that "in reforming our pension system, it is important to separate two issues".

"First, how should we pay for the cost of present pension commitments? Second, what is the right structure for our pension system: which risks should be borne individually and which collectively?

"A debate is needed over whether present arrangements imply too much or too little sharing of risk."

The Actuarial Profession today welcomed the suggestion but warned that it could represent a significant risk to future generations of taxpayers. The faculty's president, Harvie Brown, said it would involve the government in underwriting longevity risk.

"These new bonds could be a step forward for the UK's beleaguered pension schemes and help the market for life companies' annuity products where future demand is set to grow significantly.

"But it must not be forgotten that issuing such bonds would effectively shift the risk and the costs associated with unanticipated improvements in longevity on to future generations of taxpayer."

Last month the European Investment Bank said it would issue a 25-year 540 million-pound (775 million-euro) bond as part of a product designed by BNP Paribas aimed at protecting UK pension schemes against longevity risk.