This research is financially supported by CIRANO and by the Social Science and Humanities Research Council of Canada. This article was subject to double-blind peer review.
Measuring Longevity Risk: An Application to the Royal Canadian Mounted Police Pension Plan
Article first published online: 3 MAR 2014
© Risk Management and Insurance Review, 2014
Risk Management and Insurance Review
Volume 17, Issue 1, pages 37–59, Spring 2014
How to Cite
Boyer, M. M., Mejza, J. and Stentoft, L. (2014), Measuring Longevity Risk: An Application to the Royal Canadian Mounted Police Pension Plan. Risk Management and Insurance Review, 17: 37–59. doi: 10.1111/rmir.12018
- Issue published online: 3 MAR 2014
- Article first published online: 3 MAR 2014
An employer that sets up a defined benefit pension plan promises to periodically pay a certain sum to each participant starting at some future date and continuing until death. Although both the future beneficiary and the employer can be asked to finance the plan throughout the beneficiary's career, any shortcoming of funds in the future is often the employer's responsibility. It is therefore essential for the employer to be able to predict with a high degree of confidence the total amount that will be required to cover its future pension obligations. Applying mortality forecasting models to the case of the Royal Canadian Mounted Police pension plan, we illustrate the importance of mortality forecasting to value a pension fund's actuarial liabilities. As future survival rates are uncertain, pensioners may live longer than expected. We find that such longevity risk represents approximately 2.8 percent of the total liability ascribable to retired pensioners (as measured by the relative value at risk at the 95th percentile) and 2.5 percent of the total liabilities ascribable to current regular contributors. Longevity risk compounds the model risk associated with not knowing what is the true mortality model, and we estimate that model risk represents approximately 3.2 percent of total liabilities. The compounded longevity risk therefore represents almost 6 percent of the pension plan's total liabilities.