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Article

Unpredictable Life, Predictable Expectancy? The Impact of Future Longevity Improvements on Pension Fund Investment Strategy

Muqiu Liu, Wenyu Bai and Dan Mikulskis
Special Issues Fall 2013, 2013 (1) 73-88
Muqiu Liu
is a vice president of ALM and investment strategy at Redington in London, UK.
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  • For correspondence: muqiu.liu@redington.co.uk
Wenyu Bai
is a vice president of ALM and investment strategy at Redington in London, UK.
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  • For correspondence: wenyu.bai@redington.co.uk
Dan Mikulskis
is a co-head of ALM and investment strategy at Redington in London, UK.
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  • For correspondence: dan.mikulskis@redington.co.uk
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Abstract

Managing longevity exposure continues to be one of the greatest challenges facing defined benefit (DB) pension funds, but the size of transactions undertaken to explicitly hedge this risk remains small compared to the total risk.

This article focuses on quantifying longevity risk, with a particular focus on doing so in a way that generates actionable outcomes for investment strategy. For the first time, we focus explicitly on the impact of changes in future longevity improvements, and we express risk in terms of its potential impact on a scheme’s Required Return objective, and therefore on investment strategy. We also analyze the impact of increased longevity improvements on the efficiency of interest rate and inflation hedges a scheme may have in place.

We present the results of three relevant case studies : an underfunded scheme with the goal of full funding over ten years; a full funded scheme running a terminal portfolio; an underfunded scheme considering a partial buyout.

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Special Issues: 2013 (1)
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Unpredictable Life, Predictable Expectancy? The Impact of Future Longevity Improvements on Pension Fund Investment Strategy
Muqiu Liu, Wenyu Bai, Dan Mikulskis
Special Issues Sep 2013, 2013 (1) 73-88;

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Unpredictable Life, Predictable Expectancy? The Impact of Future Longevity Improvements on Pension Fund Investment Strategy
Muqiu Liu, Wenyu Bai, Dan Mikulskis
Special Issues Sep 2013, 2013 (1) 73-88;
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  • Article
    • Abstract
    • DB PENSION SCHEMES AND RISK MANAGEMENT
    • SETTING OBJECTIVES AND CONSTRAINTS
    • MONITORING THE PROGRESS TOWARD OBJECTIVES
    • RESPONDING TO CHANGES
    • A BRIEF HISTORY OF MORTALITY ASSUMPTIONS
    • LONGEVITY RISK AND THE IMPACT ON A GENERIC PENSION SCHEME
    • CASE STUDY 1—FULLY FUNDED PENSION SCHEME RUNNING TERMINAL PORTFOLIO
    • CASE STUDY 2—PARTIAL BUYOUT
    • CONCLUSIONS
    • APPENDIX
    • REFERENCES
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More in this TOC Section

  • Strengthening Retirement Outcomes for DB Plan Participants
  • Editor’s Letter
  • The Case for U.S. Plan-Specific Mortality Studies
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