A longevity risk is any potential risk attached to the increasing
life expectancy
Life expectancy is a statistical measure of the average time an organism is expected to live, based on the year of its birth, current age, and other demographic factors like sex. The most commonly used measure is life expectancy at birth ...
of
pensioners and policy holders, which can eventually result in higher pay-out ratios than expected for many
pension fund
A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income.
Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...
s and insurance companies.
[ ]
One important risk to individuals who are
spending down savings is that they will live longer than expected, and thus exhaust their savings, dying in
poverty
Poverty is the state of having few material possessions or little income. Poverty can have diverse or burdening relatives. This is also referred to as "outliving one's savings" or "outliving one's assets".
Individuals
Individuals often underestimate longevity risk. In the United States, most retirees do not expect to live past 85, but this is in fact the median conditional life expectancy for men at 65 (half of 65-year-old men will live to 85 or older, and more women will).
Low interest rates and declining returns exacerbating longevity risk
The collapse in returns on
government bond
A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity dat ...
s is taking place against the backdrop of a protracted fall in returns for other core assets such as blue chip
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a compan ...
s, and, more importantly, a silent demographic shock. Factoring in the corresponding longevity risk, pension
premiums could be raised significantly while
disposable income
Disposable income is total personal income minus current income taxes. In national accounts definitions, personal income minus personal current taxes equals disposable personal income. Subtracting personal outlays (which includes the major ...
s stagnate and employees work longer years before retiring.
Bibliography
* Vincent Bazi & M. Nicolas J. Firzli, "1st annual World Pensions & Investments Forum", Revue Analyse Financière, Q2 2011, pp. 7–8
*Thomas Crawford, Richard de Haan, & Chad Runchey, "Longevity risk quantification and management: a review of relevant literature", The Society of Actuaries, March 2008
* Gavin Jones, "Financial Aspects of Longevity Risk", Cass School International Conference on Longevity, 18 Feb. 2005
References
External links
General information
Longevity risk transfer or reinsurance news and coverage
*
{{Finance
Actuarial science
Pensions