Longevity Hedging for Dutch Pensions: q‑Forward Fair Value vs. Cost‑of‑Capital Pricing under the CBD Model — Expanded with APA Citations

Abstract

This paper studies longevity hedging for Dutch pensions using strips of q‑forwards that linearly transfer mortality risk to capital markets. We link demographic forecasting to market‑consistent hedging and compare fair q‑forward rates with Solvency‑II Cost‑of‑Capital (CoC) loaded rates to provide a consistent pricing yardstick Mortality for ages 65–74 is bucketized and projected for 2011–2040 using models from the Lee–Carter/CBD family to obtain expected death probabilities by year. Discounting uses the EIOPA EUR no‑VA curve smoothed to enforce monotonicity in discount factors to avoid spurious humps from interpolation noise. A static strip of q‑forwards is calibrated to match first‑order sensitivities of the liability present value with respect to expected q to deliver linear risk neutralization. Monte‑Carlo experiments apply multiplicative shocks to expected death probabilities to quantify hedge effectiveness under several volatility scales that emulate modelling uncertainty. Using the monotone discount curve, the base PV equals 19.956423 and the unhedged standard deviations of ΔPV for σ=5/10/15% are 0.0557/0.1122/0.1673 while the hedged standard deviations shrink to 0.00012/0.00051/0.00113, implying HE of 99.9995%/99.9979%/99.9955% consistent with first‑order theory. We discuss economic materiality via 95% ranges, robustness to σ, the importance of discount‑curve monotonicity, sparse‑strip implementability, and a mapping from Solvency‑II CoC risk margins to q‑forward premia for price benchmarking.