There are several risk factors relevant for defined-benefit pension plan’s liabilities. Until recently, most of the pension plans’ sponsors were especially concerned with the interest-rate and inflation risk, which have been often analysed by academics and practitioners. At the same time in the last years another type of risk became a very important issue for many pension plans, the so-called longevity risk. Plans’ sponsors faced with rapid mortality improvements and thus potential changes in their liabilities are now starting to pay much more attention to this risk. However, the question of consistent analysis of longevity along with other risk factors and its contribution to the overall risk for the liability of a pension plan still remains open for many companies. This paper aims to fill this gap and proposes an integrated framework in which longevity risk can be quantified and compared to other risk factors in a pension plan. In order to forecast improvements in mortality rates we use a stochastic intensity model, based on an extended Cox-Ingersoll-Ross process. As a benchmark the well-known Lee-Carter model is chosen. Both models are calibrated to the historical mortality data. We apply presented methodologies to different sample pension plans and compare the level of longevity risk with inflation and interest-rate risk at different time horizons.     «

There are several risk factors relevant for defined-benefit pension plan’s liabilities. Until recently, most of the pension plans’ sponsors were especially concerned with the interest-rate and inflation risk, which have been often analysed by academics and practitioners. At the same time in the last years another type of risk became a very important issue for many pension plans, the so-called longevity risk. Plans’ sponsors faced with rapid mortality improvements and thus potential changes in t...     »