Mortality Assumption and Longevity Risk: Implications for Pension Funds and Annuity Providers
Released in December 2014, this publication assesses how pension funds, annuity providers and the regulatory framework account for future improvements in mortality and life expectancy. The analysis 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. Finally, 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.
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 each country.
The results from the analysis show that failure to account for future improvements in mortality can expose pension funds and annuity providers to an expected shortfall of provisions of well over 10% of their liabilities. Likewise, the use of assumptions which are not reflective of recent improvements in mortality can expose the pension plan or annuity provider to the need for a significant increase in reserves.
The study focuses on the experiences of several OECD countries including Canada, Chile, France, Germany, Korea, Japan, Mexico, Spain, Switzerland, United States and the United Kingdom. It also includes a report based on the experience of Latin American countries.
|Longevity risk is a very long-term risk. Its impact runs from the time an individual joins a pension fund, let’s say age 25, until s/he passes away, around age 80-90. Consequently, assumptions allowing for future improvements in mortality and life expectancy need to run for around 60 years at least.
Pension Markets in Focus
Retirement Savings Adequacy
Improving the design of retirement saving pension plans
Global pension statistics
Pensions at a Glance
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