This paper examines how uncertainty regarding future mortality and life expectancy outcomes, i.e.
longevity risk, affects employer-provided defined benefit (DB) private pension plans liabilities. The paper
argues that to assess uncertainty and associated risks adequately, a stochastic approach to model mortality
and life expectancy is preferable because it permits to attach probabilities to different forecasts. In this
regard, the paper provides the results of estimating the Lee-Carter model for several OECD countries.
Furthermore, it conveys the uncertainty surrounding future mortality and life expectancy outcomes by
means of Monte-Carlo simulations of the Lee-Carter model.
In order to assess the impact of longevity risk on employer-provided DB pension plans, the paper examines
the different approaches that private pension plans follow in practice when incorporating longevity risk in
their actuarial calculations. Unfortunately, most pension funds do not fully account for future
improvements in mortality and life expectancy. The paper then presents estimations of the range of
increase in the net present value of annuity payments for a theoretical DB pension fund. Finally, the paper
discusses several policy issues on how to deal with longevity risk emphasizing the need for a common
approach.
JEL codes: J11, J26, J32, G23, C15, C32
Keywords: Demographic forecast; mortality and life expectancy; life tables; longevity risk, retirement;
private pensions; defined-benefit pension plans; Lee-Carter models; Monte Carlo methods, histograms.