The impact of aggregate mortality risk on defined benefit pension plans

The

impact of aggregate mortality risk on defined benefit pension plans

Dushi

Irena

Dushi, Irena

Author

Friedberg

Leora

Friedberg, Leora

Author

Webb

Anthony

Webb, Anthony

Author

text

working paper

Chestnut Hill, Mass. Center for Retirement Research at Boston College20062006monographic

Chestnut Hill, Mass.

Center for Retirement Research at Boston College

2006

monographic

Englisheng

English

eng

electronicapplication/pdfborn digital

electronic

application/pdf

born digital

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.

Irena Dushi, Leora Friedberg, and Anthony Webb.

CRR WP2006-21

CRR WP

2006-21

http://crr.bc.edu/images/stories/Working_Papers/wp_2006-21.pdf

MChBEnglisheng

MChB

Englisheng

English

eng