The Impact of Aggregate Mortality Risk on Defined Benefit Pension Plans
AbstractWe calculate the risk faced by defined benefit plan providers arising from uncertain aggregate mortality — the risk that the average participant will live longer than expected. First, comparing the widely cited Lee-Carter model to industry benchmarks, we show that plan providers appear to substantially underestimate the longevity of their employees. The resultant understatement of liabilities is 15.2 percent, when weighted by the characteristics of typical male participants in defined benefit plans, and reaches as much as 25.2 percent for male workers aged 22. Next, we consider the substantial mortality risk that arises even if plan providers were to use the Lee-Carter model or other unbiased forecasts of mortality reductions. We calculate the consequences for plan liabilities if aggregate mortality declines unexpectedly faster than is predicted by an unbiased projection. There is a 5 percent chance that liabilities of a terminated plan would be 2.9 to 5.1percent higher than what is expected, depending on the mix of workers covered. Lastly, we explain how longevity bonds might be used to transfer mortality risk from defined benefit plans to the capital markets, and we calculate a risk premium for a hypothetical frozen plan.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number wp2006-21.
Length: 32 pages
Date of creation: Nov 2006
Date of revision: Nov 2006
Contact details of provider:
Postal: Hovey House, 140 Commonwealth Avenue, Chestnut Hill, MA 02467
Phone: (617) 552-1762
Fax: (617) 552-0191
Web page: http://crr.bc.edu/
More information through EDIRC
aggregate mortality risk; defined benefit; pension plans;
Other versions of this item:
- Dushi, Irena & Friedberg, Leora & Webb, Tony, 2010. "The impact of aggregate mortality risk on defined benefit pension plans," Journal of Pension Economics and Finance, Cambridge University Press, vol. 9(04), pages 481-503, October.
- NEP-ALL-2007-08-08 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Shripad Tuljapurkar & Carl Boe, . "Mortality Change and Forecasting: How Much and How Little Do We Know?," Pension Research Council Working Papers 98-2, Wharton School Pension Research Council, University of Pennsylvania.
- Dushi, Irena & Webb, Anthony, 2004. "Household annuitization decisions: simulations and empirical analyses," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(02), pages 109-143, July.
- Angus Deaton & Christina Paxson, 2001.
"Mortality, Income, And Income Inequality Over Time In Britain And The United States,"
267, Princeton University, Woodrow Wilson School of Public and International Affairs, Center for Health and Wellbeing..
- Angus S. Deaton & Christina Paxson, 2004. "Mortality, Income, and Income Inequality over Time in Britain and the United States," NBER Chapters, in: Perspectives on the Economics of Aging, pages 247-286 National Bureau of Economic Research, Inc.
- Angus Deaton & Christina Paxson, 2001. "Mortality, Income, and Income Inequality Over Time in Britain and the United States," NBER Working Papers 8534, National Bureau of Economic Research, Inc.
- Anthony Webb & Shenyi Jiang & Wei Sun, 2010.
"Did the Housing Boom Increase Household Spending,"
Issues in Brief
ib2010-10, Center for Retirement Research, revised Jul 2010.
- Ronald Lee & Timothy Miller, 2001. "Evaluating the performance of the lee-carter method for forecasting mortality," Demography, Springer, vol. 38(4), pages 537-549, November.
- Alan L. Gustman & Thomas L. Steinmeier & Olivia Mitchell, 1994. "The role of pensions in the labor market: A survey of the literature," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 47(3), pages 417-438, April.
- Jeffrey R. Brown & Peter R. Orszag, 2006. "The Political Economy of Government-Issued Longevity Bonds," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 611-631.
- Andrew J. G. Cairns & David Blake & Kevin Dowd, 2006. "A Two-Factor Model for Stochastic Mortality with Parameter Uncertainty: Theory and Calibration," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 687-718.
- Joelle H. Fong & John Piggott & Michael Sherris, 2012. "Public Sector Pension Funds in Australia: Longevity Selection and Liabilities," Working Papers 201217, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.
- John Kiff & Michael Kisser & Mauricio Soto & Stefan E. Oppers, 2012. "The Impact of Longevity Improvements on U.S. Corporate Defined Benefit Pension Plans," IMF Working Papers 12/170, International Monetary Fund.
- Shin, Inyong, 2012.
"The Effect of Pension on the Optimized Life Expectancy and Lifetime Utility Level,"
41374, University Library of Munich, Germany.
- Shin, Inyong, 2012. "The Effect of Pension on the Optimized Life Expectancy and Lifetime Utility Level," MPRA Paper 41375, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Grzybowski) or (Christopher F Baum).
If references are entirely missing, you can add them using this form.