Chapter 4: ‘Helping Savers to Manage Longevity Risk’
“We Need a National Narrative: Building a Consensus around Retirement Income”, Report of the Independent Review of Retirement Income , 2016
33 Pages Posted: 10 Jul 2020
Date Written: March 1, 2016
A particularly important issue in retirement income provision is longevity risk. There are two components to longevity risk. The first is the uncertainty over how long any particular pension scheme member is going to live after retirement. This is known as idiosyncratic longevity risk. Both individuals and schemes face idiosyncratic longevity risk. The second is uncertainty over how long members of a particular age cohort are going to live after retirement. This is known as systematic longevity risk. Only schemes face systematic longevity risk. Individuals have a poor understanding of idiosyncratic longevity risk. Pension schemes can reduce idiosyncratic longevity risk by pooling the risk amongst a large number of scheme members, i.e., by taking advantage of the law of large numbers. Systematic longevity risk, however, cannot be reduced in this way: it needs to be hedged using a suitable hedging instrument.
JEL Classification: G22
Suggested Citation: Suggested Citation