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The Impact of Aggregate Mortality Risk on Defined Benefit Pension Plans

Author

Listed:
  • Irena Dushi
  • Leora Friedberg

    (Department of Economics, University of Virginia)

  • Anthony Webb

    (Center for Retirement Research)

Abstract

We calculate the risk faced by defined benefit plan providers arising from uncertain aggregate mortality — the risk that the average participant will live longer than expected. First, comparing the widely cited Lee-Carter model to industry benchmarks, we show that plan providers appear to substantially underestimate the longevity of their employees. The resultant understatement of liabilities is 15.2 percent, when weighted by the characteristics of typical male participants in defined benefit plans, and reaches as much as 25.2 percent for male workers aged 22. Next, we consider the substantial mortality risk that arises even if plan providers were to use the Lee-Carter model or other unbiased forecasts of mortality reductions. We calculate the consequences for plan liabilities if aggregate mortality declines unexpectedly faster than is predicted by an unbiased projection. There is a 5 percent chance that liabilities of a terminated plan would be 2.9 to 5.1percent higher than what is expected, depending on the mix of workers covered. Lastly, we explain how longevity bonds might be used to transfer mortality risk from defined benefit plans to the capital markets, and we calculate a risk premium for a hypothetical frozen plan.

Suggested Citation

  • Irena Dushi & Leora Friedberg & Anthony Webb, 2006. "The Impact of Aggregate Mortality Risk on Defined Benefit Pension Plans," Working Papers, Center for Retirement Research at Boston College wp2006-21, Center for Retirement Research, revised Nov 2006.
    • Handle: RePEc:crr:crrwps:wp2006-21
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    References listed on IDEAS

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    Cited by:

    1. Mr. John Kiff & Michael Kisser & Mauricio Soto & Mr. S. E Oppers, 2012. "The Impact of Longevity Improvements on U.S. Corporate Defined Benefit Pension Plans," IMF Working Papers 2012/170, International Monetary Fund.
    2. Torben M. Andersen & Marias H. Gestsson, 2021. "Annuitization and aggregate mortality risk," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(1), pages 79-99, March.
    3. Shin, Inyong, 2012. "The Effect of Pension on the Optimized Life Expectancy and Lifetime Utility Level," MPRA Paper 41374, University Library of Munich, Germany.
    4. Helena Chuliá & Montserrat Guillén & Jorge M. Uribe, 2015. "Mortality and Longevity Risks in the United Kingdom: Dynamic Factor Models and Copula-Functions," Working Papers 2015-03, Universitat de Barcelona, UB Riskcenter.
    5. Latifa AITOUTOUHEN & Faris HAMZA, 2016. "Financial and Econometric Study of the Sustainability and Evaluation of Scenarios of Reforms for the Civil Regime of Moroccan," Turkish Economic Review, KSP Journals, vol. 3(4), pages 652-667, December.
    6. Srichander Ramaswamy, 2012. "The sustainability of pension schemes," BIS Working Papers 368, Bank for International Settlements.
    7. Inyong Shin, 2018. "Could pension system make us happier?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 6(1), pages 1452342-145, January.
    8. Joelle H. Fong & John Piggott & Michael Sherris, 2012. "Public Sector Pension Funds in Australia: Longevity Selection and Liabilities," Working Papers 201217, ARC Centre of Excellence in Population Ageing Research (CEPAR), Australian School of Business, University of New South Wales.

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