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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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Executive summary

This publication presents the results of the OECD project on mortality assumptions and longevity risk. The project looks first at the mortality tables typically used by pension funds and annuity providers to determine the amount of funding needed to meet future expected pension and annuity payments. These can be specific tables required by the regulatory framework or those most commonly used by practitioners. The study then assesses whether these standard mortality tables account for future improvements in mortality and life expectancy and looks at how those future improvements are included. In general annuity providers are found to account more often for mortality improvements in their assumptions than are pension funds. The analysis herein also provides details regarding the standard mortality tables and assumptions used in 15 countries.

English

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