Longevity Risk: Its Impact on Pension Schemes and the Mitigation Strategies

Longevity Risk, the risk that pension scheme members live longer than expected, has emerged as a critical concern for institutions, individuals, policymakers and pension scheme stakeholders in the U.K. As life expectancy continues to rise due to medical advancements and improved standards of living, pension providers face the growing challenge of ensuring that retirees receive benefits for potentially longer-than-anticipated durations. This report explores the various impact of longevity risk on both defined benefit (DB) and defined contribution (DC) pension schemes, with a focus on the financial, actuarial and sustainability implications. For DB schemes, extended lifespans can significantly increase liabilities, straining sponsor funding requirements and leading to funding any deficits. In DC schemes, longevity risk is largely transferred to the individual, raising concerns about the adequacy of retirement income and the risk of outliving the retirement savings. The report further examines the pattern of possible future liabilities based on the U.K. mortality tables and improvement projections. To address these challenges, we have outlined some mitigation strategies that can be put in place. These include acceptance of the reality of longevity risk rather than undermining or ignoring its existence, Buy-ins, Buy-outs, Longevity swaps and diversification of investment portfolio –particularly in the emerging longevity bond market. This report essentially underscores the need for pension scheme sponsors, government and individuals to be proactive towards acknowledging and managing longevity risk, as the sustainability of pension promises – and therefore financial security in retirement – depends on how this risk is addressed in this new era.