There is provided a computer-implemented method of estimating a capital
reserve requirement to cover the longevity risk exposure of a financial
instrument in the case of a future longevity shock, the financial
instrument undertaking to pay to an investor sums according to a payment
schedule of amounts arranged to match with the future cash flow
obligations of a pension scheme to at least a portion of its members. The
method comprises: (a) calculating, using computing apparatus, an expected
payment schedule of the financial instrument by calculating what the cash
flow obligations of the pension scheme to its relevant members would be
in the case of an expected longevity scenario for the pension scheme
membership occurring; (b) calculating, using computing apparatus, a
present value of the financial instrument in the case of a stressed
longevity scenario for the pension scheme membership in which a
longevity-related shock to the expected longevity scenario of the pension
scheme membership occurs; and (c) calculating, using computing apparatus
and using the calculations of the expected payment schedule and a present
value of the financial instrument in the case of a stressed longevity
scenario, an estimate of the longevity capital reserve required to ensure
that the future cash flow obligations of the financial instrument would
be covered in the event that the stressed longevity scenario were to
occur.