Index-based swap
\ˈɪndɛks\-\beɪst\ \swɑp\
A type of longevity swap that uses the mortality experience of a standard reference population (or "index") to determine actual mortality rates for a pension plan. This helps hedge trend risk, which is the risk that future improvements in life expectancy differ from expectations, which is a major component of longevity risk for large pension schemes.
To reduce basis risk (the mismatch between the index and the actual population), some models use indices tailored to different socio-economic groups or adjust the swap to better reflect the characteristics of the pension plan’s members.
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