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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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Trends in life expectancy and mortality improvements: Implications for pension funds and annuity providers

The analysis in this chapter provides an overview of the trends in life expectancy for the countries considered. It also examines whether the standard mortality tables used by pension funds and annuity providers to value their liabilities could potentially expose them to an expected shortfall in provisions to meet future pension and annuity payments. Historical trends in the population’s mortality drive the expectations about what the improvements in life expectancy will be in the future, and if assumptions are not in line with these expectations, a shortfall in provisions set aside to fund future payments is more likely to result.

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