A longevity risk is any potential risk attached to the increasing
life expectancy
Human life expectancy is a statistical measure of the estimate of the average remaining years of life at a given age. The most commonly used measure is ''life expectancy at birth'' (LEB, or in demographic notation ''e''0, where '' ...
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 program, fund, or scheme which provides pension, retirement income. The U.S. Government's Social Security Trust Fund, which oversees $2.57 trillion in assets, is the ...
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 a state or condition in which an individual lacks the financial resources and essentials for a basic standard of living. Poverty can have diverse Biophysical environmen ...
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 (finance), bond issued by a government to support government spending, public spending. It generally includes a commitment to pay periodic interest, called Coupon (finance), coupon payments' ...
s is taking place against the backdrop of a protracted fall in returns for other core assets such as blue chip
stock
Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...
s, and, more importantly, a silent demographic shock. Factoring in the corresponding longevity risk, pension
premiums could be raised significantly while
disposable incomes 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
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{{Finance
Actuarial science
Pensions