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The impact of aggregate mortality risk on defined benefit pension plans

Published online by Cambridge University Press:  05 March 2010

IRENA DUSHI ,
LEORA FRIEDBERG  and
TONY WEBB
IRENA DUSHI
Affiliation:
Social Security Administration
LEORA FRIEDBERG
Affiliation:
University of Virginia
TONY WEBB*
Affiliation:
Center for Retirement Research at Boston College
*
(e-mail: Webbaa@bc.edu)
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Abstract

We calculate the risk faced by defined benefit plan providers arising from uncertain aggregate mortality – the risk that the average participant will live longer than expected. First, comparing the widely cited Lee–Carter model to industry benchmarks that are commonly employed by plan providers, we show that these benchmarks appear to substantially underestimate longevity. The resultant understatement of liabilities may reach 12.2% for typical male participants in defined benefit plans and may reach 22.4% for male workers aged 22. Next, we consider consequences for plan liabilities if aggregate mortality declines unexpectedly faster than is predicted by a putatively unbiased projection. There is a 5% chance that liabilities of a terminated plan would be 3.1% to 5.3% higher than what is expected, depending on the mix of workers covered.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 9 , Issue 4 , October 2010 , pp. 481 - 503
Copyright
Copyright © Cambridge University Press 2010

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