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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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Policy options for managing longevity risk

This chapter discusses how pension funds and annuity providers can manage longevity risk and how the regulatory framework can support this effort. Regulators should enable and encourage the management of longevity risk as they have an interest to ensure that pension funds and annuity providers will be able to meet future payment obligations to retirees.The first step in managing longevity risk is to ensure that pension funds use appropriate and up to date mortality tables that incorporate expected future improvements in mortality and life expectancy and are based on the relevant populations. For the unexpected future improvements in mortality and life expectancy, regulators may want to facilitate capital market solutions to hedge or mitigate this risk using standardised index based longevity hedges that would promote transparent and liquid secondary markets. Governments could also provide a reliable longevity index and mortality projections. Finally governments could assist by establishing capital and funding requirements as well as accounting standards that ensure appropriate valuations and reflect the risks faced.

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