Measuring Longevity Risk for a Canadian Pension Fund

32 Pages Posted: 29 Aug 2011

See all articles by M. Martin Boyer

M. Martin Boyer

HEC Montreal - Department of Finance

Lars Stentoft

Department of Economics, University of Western Ontario; Center for Interuniversity Research and Analysis on Organization (CIRANO); Aarhus University - CREATES

Joanna Mejza

HEC Montreal

Date Written: April 29, 2011

Abstract

In this paper we consider two particular Canadian defined benefit pension plans to illustrate the importance of adequate mortality forecasting on actuarial liabilities. An employer who sets up an employee defined benefit pension plan promises to periodically pay a certain sum to the participant until death. Both the employee and the employer finance these periodical payments during the beneficiary’s career. Any shortcoming of funds in the future is, however, the employer’s responsibility. It is therefore essential for the employer to be able to predict with a high degree of confidence the total amount that will be required to cover its obligations to the future retiree. If increases in life expectancy were predictable and taken into consideration when establishing retirement funds, assessing future liabilities would be riskless in that respect. Unfortunately, future survival rates are uncertain. On that account, pensioners may outlive their life expectancies and expose pension funds to longevity risk. We present different tools to hedge this risk and the potential cost for two Canadian public pension plans.

Keywords: Cairns-Blake-Dowd model, Lee-Carter model, Pension Funds

JEL Classification: G22, G23

Suggested Citation

Boyer, M. Martin and Stentoft, Lars and Mejza, Joanna, Measuring Longevity Risk for a Canadian Pension Fund (April 29, 2011). CIRANO - Scientific Publication No. 2011s-43. Available at SSRN: https://ssrn.com/abstract=1919018 or http://dx.doi.org/10.2139/ssrn.1919018

M. Martin Boyer (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Lars Stentoft

Department of Economics, University of Western Ontario ( email )

London, Ontario N6A 5B8
Canada

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Joanna Mejza

HEC Montreal

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

Register to save articles to
your library

Register

Paper statistics

Downloads
66
Abstract Views
622
rank
335,703
PlumX Metrics