Longevity risk—Its financial impact on pensions

Abstract

We study the financial impact of longevity risk on defined benefit (DB) pension plan liabilities using the 2010 Ghana population census, and the Lee-Carter model. We compare the usual Lee-Carter model to an extended version. While we observe that Ghana’s mortality has decreased, our results show that longevity risk raises the cost of liability. We propose that defined benefit scheme trustees and fund managers, assess their funds and act on the assets available to them in a Liability-Driven Investment (LDI) Strategy tailored to the dynamics of their scheme - since there is no single best method in LDI strategy. This study may help policymakers or practitioners in their efforts to mitigate the effects of longevity risk.

Keywords

• Lee-Carter model
• Singular value decomposition (SVD)
• Liability driven strategy (LDI)
• Defined benefit (DB)
• Stochastic process
• Forecast