Because pension funds have little scope in setting the terms of the annuity contracts in the mandatory part of the system, they have not adopted an active management of longevity risk. Almost all pension funds use the mortality tables provided by the Federal Insurance Fund (FIF), with possible adjustments based on past experience, especially for pension funds with a high degree of homogeneity among their annuitants (e.g., construction workers, teachers or bank employees). Insurance companies introduced in 2000 cohort life tables for pricing their annuities in the open market, but in the mandatory pillar most institutions augment their actuarial liabilities by 0.4 to 0.5 percent every year, until the new FIF mortality rates become available, i.e., every 10 years. No attempt has been made so far to use longevity bonds or derivatives to hedge longevity risk.

In Sweden, life insurance companies and pension funds engage in asset/liability matching that is dictated by the prevalence of 5 to 10 year term annuities. Since retired workers assume both the investment and longevity risks, providers are essentially concerned with managing the risks arising from the offer of minimum guaranteed benefits. Providers invest in domestic and international equities and real estate with a view to enhancing returns and bonuses but maintain an adequate cushion of bond holdings to avoid the need to declare negative bonuses and to cover their guaranteed benefits.

The PPM where use of life annuities is compulsory has a longer horizon. It adopts a highly conservative estimation of future trends in longevity, while the recent lowering of the guaranteed benefits from an interest rate of 2.75 to 0 percent has simplified its risk management task.

In Denmark, pension institutions had expanded their equity investments in the 1990s but were hit by the dramatic fall in interest rates and large declines in equity prices between 2001 and 2003. They reacted by reducing their equity portfolios (in large part caused by the very fall of equity prices), selling short-duration bonds and buying long-duration ones, especially foreign bonds, and engaging in extensive hedging operations, mostly through the use of long-term interest rate swaps in the more liquid euro market.

Investment and risk management policies reflect the terms and conditions of collective labor agreements. Some of them provide for risk-sharing among both active and retired workers. The statutory ATP fund operates a scheme with deferred group annuities where guaranteed benefits are specified for each year's contributions and periodic bonus payments aim to maintain the real value of benefits and reflect longevity experience and investment performance. The ATP fund is hedging all its pension liabilities in the euro swap market and is using excess investment returns from its active investment management to finance longevity reserves and periodic bonuses. It has also expanded its investments in foreign bonds. Some multi-employer pension funds and life insurance companies follow similar policies, but others make less extensive use of long-term swap contracts. However, all pension institutions have adapted their guaranteed benefits to the new reality of lower nominal interest rates and have adjusted their investment portfolios to the demands of the traffic light system and regular stress testing.

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