Pension shortfalls will be exacerbated by underestimating life expectancies, a report released Thursday by Swiss Re. An essential element to preparing for longevity risk, the reinsurer found, is to develop better predictive methods for determining mortality.
“The failure to consider future drivers of mortality in historical predictions contributed to employer pension funds under-reserving for longevity risk and other bodies, including governments, not budgeting effectively for funding an ageing population,” Daniel Ryan, head of life and health research and development at Swiss Re, said in a statement.
Effective longevity models would have to take social factors, medical treatments and preventative approaches into account. The report recommends that pension plans assess their exposure to longevity risk and decide whether to pass it on to a third party that is better equipped to take on the risk.
Traditionally, the most common way to predict life expectancy is to combine current rates of mortality improvement with a long-term future assumption, the paper found. Computer-based models that provide forecasts based on historical mortality experiences are also used.
The paper notes, though, that the “complex interaction” of various risk factors, including disease and improved treatments and technology, make it difficult to predict longevity based on historical trends alone. As such, a “life course” approach would take more than history into account when predicting mortality, including future developments in societal changes, medical practice and technological advances.
In order to better understand mortality, the paper suggests building a multi-discipline approach that involves experts from various professions:
- Actuaries to assess the financial impact of future events
- Medical experts to provide insight into future developments in diagnoses and disease
- Epidemiologists to analyze risk factors that lead to disease
- Pharmacologists for their expertise on new drugs and their impact
- Demographers to help aggregate influence on population size
- Gerontologists for their insight into the physical, mental and social effects of aging
- Governments have a “vested interest” in understanding their citizens’ longevity