Automatic Adjustment Mechanisms in Public Pension Schemes to Address Population Ageing and Socioeconomic Disparities in Longevity

Many pension systems require and continue to need change to maintain longterm financial sustainability. Most developed countries’ policy-makers have been pushed to reform their pension systems in order to preserve or re-establish financial sustainability. As longevity heterogeneity is frequently disregarded in the policy chosen, the pursuit of financial sustainability is done at the expense of intra-generational actuarial fairness. We propose a pension system management system based on two adaptation mechanisms: The first dynamic mechanism is integrated directly into the pension formula and corrects the heterogeneity of longevity when it exists between the agents of the pension scheme. A steering mechanism for both the contribution rate and the mean benefit ratio respects Musgrave’s rule, which makes it possible to distribute the demographic risk between working people and retirees. In order to capture both effects and incorporate a mortality component into the pension formula, we model longevity heterogeneity and ageing in a pension based on historical data.