Longevity in North America: an underestimated risk

Medical advances have helped increase life expectancy, but with this good news comes challenges in retirement financing.

The challenge is not that people are living longer – which is a positive trend in society – but the fact that how long they live has been significantly underestimated for decades.

The Society of Actuaries' Retirement Plans Experience Committee (RPEC) recently released a report which introduces a new mortality improvement scale that may be used in pension valuations. This new improvement scale, Scale BB, has been developed as an interim table that may be used until the work on a new set of retirement plan mortality tables and mortality improvement rates. These would be the successors to the RP-2000 tables and Scale AA.

Addressing the 7-trillion dollar question

The longevity issue is most acute in North America where over 90% of longevity risk currently sits with defined benefit (DB) pension plans and is estimated at over USD 7 trillion. Even with the proposed changes, underestimating longevity risk is still a major financial concern.

George Graziani, Head Longevity for North America at Swiss Re said: "If a 70 year old, expected to die at 86, has an improvement in mortality of just one year to age 87, then a pension plan would need to allow for an increase of 4% in liabilities."

On 7 February 2013, The Wall Street Journal published the article "Longevity bond market may spring to life", which highlighted the traction which is starting to be seen in the US market and featured commentary from Graziani.

Support for insurers and pension funds

A combined approach is needed with governments, businesses and financial service providers working in tandem to create a suitable plan. Educating the general population about the issue is also important.

"As a provider of risk transfer services to the life industry for over a century," concludes Graziani, "Swiss Re can help insurers and pension funds in addressing their longevity exposure."


Published 23 April 2013

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