Managing the demographic risk of pension systems

Demographic changes observed at present on the European markets strongly determine the sustainability of pension systems. The most important changes in this context include: increase of life expectancy, decline of fertility rate, ageing of societies, and migration flows. All the above trends pose a major risk, mostly for public pension systems that finance the distribution of retirement benefits from mandatory contributions collected from earners in the working-age population. Pension policies should be designed to minimize the demographic risk and limit the risk of old-age poverty. The risk of longevity, associated with the steady increase of life expectancy rates, is another important aspect to be managed by all institutions involved in effective distribution of pension benefits, be it from the base part of the pension fund or any supplementary funds. This paper aims to emphasize the significance of demographic risk in a pension system, identify the types of demographic risk and the associated risk management methods, and to present the projected impact of demographic risk upon the replacement rate.