BNP Paribas and Deutsche Bank are developing derivative products that pension funds could trade to hedge against the cost of supporting old people who live longer than expected.

The products, dubbed "mortality derivatives", would provide pension schemes that have big deficits with an additional tool to manage the cost of servicing the shortfall. Partha Dasgupta, chief executive of the UK government-sponsored Pension Protection Fund, hopes to see the development of a market for mortality risk. He said: "We're trying to encourage the banks to co-operate. Assuming we can get the right pricing data, I don't see why we shouldn't have a fully functioning secondary market in five years." Market sources said Credit Suisse, which last year launched a longevity index based on US mortality data, looked at offering products linked to the index but had not gone ahead. It is also looking at launching a longevity index in Europe. Investment consultants said a mortality swap, where a pension fund pays a fixed rate to receive protection against changes in mortality, was a likely outcome but cautioned against the bespoke nature of the data necessary to make this work.