Impact of longevity risk on pension systems

Abstract

According to the "2019 Revision of World Population Prospects" prepared by the Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, life expectancy has risen from 60.26 in 201 0 to 66.70 in 2019. This increase in life expectancy is attributed to improved healthcare facilities, proper education, diversification in agricultural production and an increase in living standards. The improvement in life expectancy is positive news but it results in increased longevity risk. Longevity risk is the risk that individuals will have longer lifetimes than expected. In pensions, this is the risk attached to the increasing life expectancy of pensioners and policyholders, which will result in higher pay-out ratios than expected for many pension funds. If gains in life expectancy could be forecasted and factored in retirement planning, then the effect of longevity risk could be minimal and thus negligible but improvement in life expectancy and mortality are uncertain. Thus, longevity risk is related to the uncertainty surrounding future mortality and life expectancy.