Longevity Risk and Private Pensions

27 Pages Posted: 8 Feb 2007

See all articles by Pablo Antolin

Pablo Antolin

Organisation for Economic Cooperation and Development, OECD

Date Written: January 2007


This paper examines how uncertainty regarding future mortality and life expectancy outcomes, i.e. longevity risk, affects employer-provided defined benefit (DB) private pension plans liabilities. The paper argues that to assess uncertainty and associated risks adequately, a stochastic approach to model mortality and life expectancy is preferable because it permits to attach probabilities to different forecasts. In this regard, the paper provides the results of estimating the Lee-Carter model for several OECD countries. Furthermore, it conveys the uncertainty surrounding future mortality and life expectancy outcomes by means of Monte-Carlo simulations of the Lee-Carter model.

In order to assess the impact of longevity risk on employer-provided DB pension plans, the paper examines the different approaches that private pension plans follow in practice when incorporating longevity risk in their actuarial calculations. Unfortunately, most pension funds do not fully account for future improvements in mortality and life expectancy. The paper then presents estimations of the range of increase in the net present value of annuity payments for a theoretical DB pension fund. Finally, the paper discusses several policy issues on how to deal with longevity risk emphasizing the need for a common approach.

Keywords: Demographic forecast, mortality and life expectancy, life tables, longevity risk, retirement, private pensions, defined-benefit pension plans, Lee-Carter models, Monte Carlo methods, histograms

JEL Classification: J11, J26, J32, G23, C15, C32

Suggested Citation

Antolin, Pablo, Longevity Risk and Private Pensions (January 2007). OECD Working Paper on Insurance and Private Pensions No. 3 , Available at SSRN: https://ssrn.com/abstract=962028 or http://dx.doi.org/10.2139/ssrn.962028

Pablo Antolin (Contact Author)

Organisation for Economic Cooperation and Development, OECD ( email )

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