March 10, 2017

Major improvements in human health and well-being have led to a drastic rise in global life expectancy — from approximately 48 years in 1950 to over 71 years in 2015. But in Longevity and Liabilities, PGIM says that with progress in extending life spans come new challenges for governments, private pension plans, and individuals trying to generate sufficient retirement income in an aging world.

 Longevity and Liabilities ReportThe most discussed challenge is the cost of belatedly catching up to the increased social security, pension, and individual retirement income requirements resulting from the currently expected increases in life spans. Less well appreciated, but of similar magnitude and importance, are the costs of longevity risk — unexpected increases in human life spans beyond what actuaries and demographers have currently forecast. The IMF estimates that if everyone lives three years longer than expected — the average underestimation of longevity in the past — the present value of additional retirement expenses during these additional years of life could amount to 25-50% of global GDP.

For pension plan sponsors, especially in the US, longevity risk has often taken a backseat to investment and interest rate risks. And for good reason: the financial crisis decimated portfolios, and persistently low interest rates have made underfunding problems worse. But given ongoing improvements in life expectancy, plan sponsors will increasingly have to focus on the risk posed by unexpected longevity improvements to the funded status of pensions, especially as a persistently low rate environment only exacerbates the present financial impact of longevity risk. Even sponsors with completely frozen, fully funded plans will be confronted with future liability growth due to longevity improvements. Understanding and quantifying the magnitude of longevity risk can help plan sponsors establish a framework for taking the appropriate actions today to ensure the ongoing health of their pension plans.

In this paper, PGIM builds upon the insights from our recent report, A Silver Lining: The Investment Implications of an Aging World, to discuss the challenges posed to pension plan sponsors by longevity risk and the options available for managing it.

Click here to dowload Longevity and Liabilities. To discuss longevity trends and their potential impact, contact Judi Flynn.