Measuring Longevity Risk: An Application to the Royal Canadian Mounted Police Pension Plan

23 Pages Posted: 4 Mar 2014

See all articles by M. Martin Boyer

M. Martin Boyer

HEC Montreal - Department of Finance

Joanna Mejza

HEC Montreal

Lars Stentoft

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

Date Written: Spring 2014

Abstract

An employer that sets up a defined benefit pension plan promises to periodically pay a certain sum to each participant starting at some future date and continuing until death. Although both the future beneficiary and the employer can be asked to finance the plan throughout the beneficiary's career, any shortcoming of funds in the future is often 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 future pension obligations. Applying mortality forecasting models to the case of the Royal Canadian Mounted Police pension plan, we illustrate the importance of mortality forecasting to value a pension fund's actuarial liabilities. As future survival rates are uncertain, pensioners may live longer than expected. We find that such longevity risk represents approximately 2.8 percent of the total liability ascribable to retired pensioners (as measured by the relative value at risk at the 95th percentile) and 2.5 percent of the total liabilities ascribable to current regular contributors. Longevity risk compounds the model risk associated with not knowing what is the true mortality model, and we estimate that model risk represents approximately 3.2 percent of total liabilities. The compounded longevity risk therefore represents almost 6 percent of the pension plan's total liabilities.

Suggested Citation

Boyer, M. Martin and Mejza, Joanna and Stentoft, Lars, Measuring Longevity Risk: An Application to the Royal Canadian Mounted Police Pension Plan (Spring 2014). Risk Management and Insurance Review, Vol. 17, Issue 1, pp. 37-59, 2014. Available at SSRN: https://ssrn.com/abstract=2404161 or http://dx.doi.org/10.1111/rmir.12018

M. Martin Boyer

HEC Montreal - Department of Finance ( email )

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

Joanna Mejza

HEC Montreal

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

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