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Longevity Risk and Private Pensions

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  • Pablo Antolin

Abstract

This paper examines how uncertainty regarding future mortality and life expectancy outcomes, i.e. longevity risk, affects employer-provided defined benefit (DB) private pension plans liabilities. For this purpose, it examines the different approaches that private pension plans follow in practice when incorporating longevity risk in their actuarial calculations. Unfortunately, most pension funds do not fully account for future improvements in mortality and life expectancy. The paper then presents estimations of the range of increase in the net present value of annuity payments for a theoretical DB pension fund. Finally, the paper discusses several policy issues on how to deal with longevity risk emphasising the need for a common approach. In this regard, it argues, following Antolin (2007), that to assess uncertainty and associated risks adequately, a stochastic approach to model mortality and life expectancy is preferable because it permits to attach probabilities to different forecasts.

Suggested Citation

  • Pablo Antolin, 2007. "Longevity Risk and Private Pensions," Financial Market Trends, OECD Publishing, vol. 2007(1), pages 107-128.
    • Handle: RePEc:oec:dafkab:5l4mbjf9s5hl
    DOI: 10.1787/fmt-v2007-art6-en
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    Cited by:

    1. Mr. John Kiff & Michael Kisser & Mauricio Soto & Mr. S. E Oppers, 2012. "The Impact of Longevity Improvements on U.S. Corporate Defined Benefit Pension Plans," IMF Working Papers 2012/170, International Monetary Fund.
    2. Josiah, J. & Gough, O. & Haslam, J. & Shah, N., 2014. "Corporate reporting implication in migrating from defined benefit to defined contribution pension schemes: A focus on the UK," Accounting forum, Elsevier, vol. 38(1), pages 18-37.
    3. Ferro, Gustavo, 2008. "Un impulso al mercado de rentas vitalicias en España [Promoting the annuities market in Spain]," MPRA Paper 20211, University Library of Munich, Germany, revised Jul 2008.
    4. Ferro, Gustavo, 2008. "On annuities: an overview of the issues," MPRA Paper 20209, University Library of Munich, Germany, revised Oct 2009.
    5. Carlos Oscar Grushka & Octavio Nicolás Bramajo & Luciana Tibi, 2020. "Mortality analysis of persons with disabilities in Argentina by age, sex and duration of benefit, 2015–16," International Social Security Review, John Wiley & Sons, vol. 73(4), pages 49-73, October.
    6. Yang, Sharon S. & Yue, Jack C. & Huang, Hong-Chih, 2010. "Modeling longevity risks using a principal component approach: A comparison with existing stochastic mortality models," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 254-270, February.
    7. Roy, Amlan, 2012. "Innovative Approaches to Managing Longevity Risk in Asia: Lessons from the West," ADBI Working Papers 353, Asian Development Bank Institute.
    8. Jr-Wei Huang & Sharon S. Yang & Chuang-Chang Chang, 2021. "Modeling Housing Price Dynamics and their Impact on the Cost of no-Negative-Equity-Guarantees for Equity Releasing Products," The Journal of Real Estate Finance and Economics, Springer, vol. 63(2), pages 249-279, August.
    9. M. Martin Boyer & Joanna Mejza & Lars Stentoft, 2014. "Measuring Longevity Risk: An Application to the Royal Canadian Mounted Police Pension Plan," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 17(1), pages 37-59, March.
    10. Rabitti, Giovanni & Borgonovo, Emanuele, 2020. "Is mortality or interest rate the most important risk in annuity models? A comparison of sensitivity analysis methods," Insurance: Mathematics and Economics, Elsevier, vol. 95(C), pages 48-58.
    11. Samuel Asante Gyamerah & Janet Arthur & Saviour Worlanyo Akuamoah & Yethu Sithole, 2023. "Measurement and Impact of Longevity Risk in Portfolios of Pension Annuity: The Case in Sub Saharan Africa," FinTech, MDPI, vol. 2(1), pages 1-20, January.
    12. Pauline Milaure Ngugnie Diffouo & Pierre Devolder, 2020. "Longevity Risk Measurement of Life Annuity Products," Risks, MDPI, vol. 8(1), pages 1-16, March.
    13. Qi Ming, 2013. "The Impact of Mortality Risk on the Asset and Liability Management of Insurance Companies," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 7(2), pages 81-104, July.
    14. 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.
    15. Ashby H. B. Monk, 2009. "Pension Buyouts: What Can We Learn From The UK Experience?," Working Papers, Center for Retirement Research at Boston College wp2009-19, Center for Retirement Research, revised Sep 2009.
    16. Alonso Meseguer, Javier & Tuesta Cárdenas, David & Torres Torres, Diego & Villamide Muiña, Begoña, 2015. "Proyecciones de tablas generacionales dinámicas de mortalidad y riesgo de longevidad en países en vías de desarrollo: El caso chileno/Projections of Dynamic Generational Mortality Tables and Longevity," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 33, pages 941-964, Septiembr.

    More about this item

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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