- Life Expectancy variance Monster
- Longevity Swaps: The Next Bubble
- Coverage Ratio Solution Space
- Exceptional Longevity Predictable
Lots of actuaries keep expending their energy on calculations of 50 years ahead mortality probabilities.... And indeed..., this is challenging....
Some research reports predict a decline in life expectation, others and more serious recent reports show a steady increase of life expectation.
We should never suggest that we're able to value a bunch of complex and systemic risks (liabilities, assets,mortality, costs, demographics, etc) into a reliable consistent model that predicts reality.
It's a farce!
- Analyze and model the short term risks
- Develop a method (system) that enables boards of directors to manage and control their risky cash flows (profit share systems, experience rating, etc.).
Instead of recalculating, checking and pondering this trend, let's take a look at the short term effects of this longevity increase trend.
Effect of 'one year life expectancy' increase
First we take a look at the cost effect of the increase of 'one year of life expectancy' on a single-premium of a (deferred) life annuity (paid-up pensions)...
( Life table total population: United States, 2003 )
Depending on the discounting interest rate, a one year improvement of longevity for a 65 old person demands a 2,3% to 4,0% increase of the liabilities.
Of course the increase of the liabilities of a portfolio (of a pension fund) depends on the (liability weighted) age distrubution of the corresponding portfolio.
Here's a simple example:
This comes close to the rule of thumb as mentioned by AEGON:
A three to four months yearly longevity-increase - as is still the actual trend - will therefore demand roughly a substantial 1,5% (yearly) of the liabilities.
This implies that in case your contribution is calculated at 4% and your average portfolio return is 7%, there's 3% left for financing longevity and indexation (=method). As 'longevity growth' in the near future will probably cost about 1,5%, there's only 1,5% left for indexation on the long run.
- Spreadsheet (xls) with data used in this blog
- Forecasting longevity of Dutch pension scheme members using postcodes
- Increasing life expectancy at pension funds (uvt;2011)
- Life Tables for the United States Social Security Area 1900-2100
- Valuing Pension Fund Liabilities on the Balance Sheet
- No limits to life expectancy?
- Broken Limits to Life Expectancy
- NRC: Explaining divergent levels of longevity (pdf;2011)
- Wolfram Alpha: Longevity U.S.
- AEGON: Longevity Rule of thumb