Nakagome- LONGEVITY RISK THE LONGEVITY RISK ASSOCIATED WITH THE PENSION LIABILITY

The human race's life expectancy has rapidly been extended in the past 100 years. This tendency is especially significant in the advanced country. For instance, the average life span of Japanese men has increased from 71.73 years old to 78.56 years old during the years from 1975 to 2005. Moreover, the average life span of Japanese women increased from 76.89 to 85.52 years old in the same period. From the viewpoint of risk management of corporate pensions, it is not desirable to have an unexpected increase in life expectancy (longevity risk). Due to recent changes in pension regulations and accounting standards, the longevity risk has become apparent to corporate sponsors and their shareholders. In this paper, we describe the longevity risk associated with the pension liability from a practical perspective. Focusing on Japanese corporate pension schemes, we illustrate a relationship between the longevity risk and the corporate pension liability. Especially, we refer to a "guaranteed period " which is a characteristic of Japanese corporate pension schemes. In order to forecast improvements in mortality rates, we use a general example of a stochastic extrapolative model (Lee-Carter model). Assuming a present value of typical pension benefits, we analyze the influence of mortality improvements on the value. At the same time, we compare cases that have different payment terms of the guaranteed period. In addition, we recognize necessity of an extension of the model through a comparison of results estimated using actual data from four countries (Japan, US, England & Wales, and Italy)