Scale of Longevity Risks for Pension and Life Annuity Providers

Improved longevity is a human triumph. But improved longevity, when it occurs among those who are no longer economically productive, has a cost. Persistent decrease in mortality rates has become a major concern of annuity and pension providers, especially mortality improvements for post-retirement ages which have significant financial impact as far as survival benefits are concerned. There are a number of broad approaches to projecting mortality improvement effects – using models based on the underlying biomedical process, models based on economic type relationships, and trend models that use extrapolation methods. This paper will, on the other hand, focus on designing a mathematical framework – force of longevity, in which the connection between longevity risks and investment risks will be established in both discrete and continuous time formats. Any longevity forecasting model could be plugged into the framework, and converted into an equivalent longevity term structure, which could be easily offset against interest rate term structure in pricing annuity products. The conclusion of the paper is: Longevity and investment should be measured in a similar framework in pricing annuity products or evaluating the future liability of a public pension system. Both must be assessed in such evaluations. Henry Hongbo JIN Centre for Pensions and Superannuation The University of New South Wales Sydney 2052, Australia email: [email protected]