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Mortality Assumptions and Longevity Risk

Implications for pension funds and annuity providers

image of Mortality Assumptions and Longevity Risk

Pension funds and annuity providers need to effectively manage the longevity risk they are exposed to. Individuals receiving a lifetime income may live longer than expected or accounted for in the actuarial calculations to provision for these liabilities. Mismanaged longevity risk can deteriorate finances, cause bankruptcy and expose individuals to the risk of losing their retirement income. To safeguard against this risk, pension funds and annuity providers must provision for future improvements in mortality and life expectancy. The regulatory framework can support the effective management of longevity risk.



This publication assesses how pension funds, annuity providers such as life insurance companies, and the regulatory framework account for future improvements in mortality and life expectancy. The study then examines the mortality tables commonly used by pension funds and annuity providers against several well-known mortality projection models with the purpose of assessing the potential shortfall in provisions. The final part of the publication identifies best practices and discusses the management of longevity risk, putting forward a set of policy options to encourage and facilitate the management of longevity risk.

 

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Assessment of the potential longevity risk in the standard mortality tables

This chapter assesses the potential longevity risk implicit in the standard mortality tables used by pension funds and annuity providers in each country. It provides a detailed analysis on which the conclusions presented in regarding the potential shortfall of the standard mortality tables are based. Results of the mortality projection model outputs are compared to historical population experience as well as to the life expectancy and annuity values given by the standard mortality tables. The potential shortfall of provisions from using each standard mortality table is calculated based on each of the mortality models and across a range of ages. Where available, the potential impact of socio-economic differences on the annuity value is also shown.

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