Longevity Risk in Notional Defined Contribution Pension Schemes: A Solution

Notional defined contribution pension schemes (NDCs) aim at reproducing the logic of a financial defined contribution plan under a pay-as-you-go framework. Of particular interest is how the accumulated capital of a deceased person is used when the death occurs prior to retirement. While in most coun...

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Bibliographic Details
Published in:Geneva papers on risk and insurance. Issues and practice 2016-01, Vol.41 (1), p.24-52
Main Authors: Arnold (-Gaille), Séverine, del Carmen Boado-Penas, María, Godínez-Olivares, Humberto
Format: Article
Language:English
Subjects:
Age
Analysis
Death benefits
Defined contribution plans
Economic development
Economics and Finance
Expected values
Finance
Hedging
Insurance
Interest rates
Life expectancy
Life insurance
Mortality
Original Article
Pension plans
Present value
Reinsurance
Retirement
Retirement planning
Risk Management
Solvency
Studies
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Summary:Notional defined contribution pension schemes (NDCs) aim at reproducing the logic of a financial defined contribution plan under a pay-as-you-go framework. Of particular interest is how the accumulated capital of a deceased person is used when the death occurs prior to retirement. While in most countries this accumulated capital (called survivor dividend, SD) is kept by the scheme, in Sweden it is distributed among the same cohort survivors. This paper aims to analyse to what extent the SD kept by most NDCs can be used to cover an unexpected longevity increase. We develop formulas under different assumptions (constant or according to Lee—Carter mortality improvements) to calculate the maximum mortality decrease a scheme can cover if the SD is not distributed. We also apply the formulas using Polish, Latvian and Swedish life tables and show that the non-distribution of the SD is a potential solution to cover the longevity risk of NDCs.
ISSN:1018-5895
1468-0440
DOI:10.1057/gpp.2015.15