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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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Mortality assumptions used by pension funds and annuity providers

This chapter examines the mortality tables that pension funds and annuity providers use for valuing pension and annuity liabilities. The mortality tables commonly used comprise assumptions on mortality rates and future improvements that are the basis for accounting for the length of time pension funds and annuity providers are expected to make payments. The risk that future mortality improvements and life expectancy outcomes prove to be different than assumed in provisions is the longevity risk that pension funds and annuity providers may be exposed to. This would mean that they may have to make payments for longer than provisioned for.

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