The mortality risk of pensions – methods of control and policy implications for the UK

Date01 October 2006
Publication Date01 October 2006
AuthorRobert Hudson
SubjectAccounting & finance
The mortality risk of
pensions methods of control and
policy implications for the UK
Robert Hudson
Leeds University Business School, University of Leeds, Leeds, UK
Purpose – Bodies with responsibilities for paying pensions to individuals face a mortality risk in
that the pensioners may prove longer lived than expected. The significant scale and uncertainity of
this risk is becoming increasingly clear. Various measures are available to control this risk and new
innovations such as mortality linked bonds and derivatives have been proposed. The purpose of this
paper is to evaluate the alternative methods of controlling morality risk and discuss their potential
policy implications.
Design/methodology/approach – The paper considers the various parties affected by mortaling
risk and assesses the difficulties of predicting mortality. Different methods of predicting mortality are
discussed. Policy issues are considered and conclusions presented.
Findings – There is a huge demand for methods of hedging and trading mortality risk. Financial
markets are responding to this with a number of insurers moving into the bulk annuity market. New
products, such as survivor bands and mortality derivatives, are just appearing in the market, it is still
to be seen whether this major financial problem will be best be solved by the financial markets or by
government intervention.
Originality/value The paper offers an evaluation of the alternative methods of controlling
mortality risk together with the potential policy implications.
Keywords Pensions, Life insurance, Life expectancy
Paper type Research paper
1. Introduction
A pension normally involves a promise by a body to pay an income to an individual for
the rest of that individual’s life. The reliability of these promises is of enormous
financial and social importance. It has been estimated that, given increases in life
expectancy and current retirement patterns, between 25 and 30 per cent of the total
population of the OECD will be pensioners within 30 years (Palmer, 2003). In the UK,
the old-age dependency ratio (the number of people aged 65 and over divided by the
number of people of working age) is on a steeply rising trend and is projected to be
about 40 per cent by 2030 (DWP, 2006).
In most advanced economies a number of different types of body may have given
pension promises. For example, in the UK there are significant sums of pensions both
paid and promised by the state, by the pension schemes of employers and via
individual private pensions which are administered by life assurance companies. The
exact nature of the promise may differ according to its source; private bodies and
public sector employers will generally have entered into a legal commitment whereas
the state will have some level of political commitment. Private schemes are normally
The current issue and full text archive of this journal is available at
The mortality
risk of pensions
Journal of Financial Regulation and
Vol. 14 No. 4, 2006
pp. 363-374
qEmerald Group Publishing Limited
DOI 10.1108/13581980610711135

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