Longevity risk
The risk of living longer than planned and so outliving one's assets or, for a pension plan or insurer, paying benefits for longer than expected. A lifetime annuity transfers it to an insurer.
Where you will meet it
Longevity risk appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Explain defined benefit pension obligations and how they flow through the statements
“A defined benefit plan promises a specified benefit, so the employer bears the investment and longevity risk.”
- Explain how defined benefit and defined contribution pension plans work
“In a defined contribution plan the employer's obligation ends with making the agreed contributions: the employee usually chooses how the account is invested, and the retirement benefit depends on contributions and investment returns, so the employee bears investment and longevity risk.”
- Set out the risk measures relied on by insurers, pension funds, asset managers, and banks
“Property and casualty insurers watch catastrophe exposure and asset–liability matching; life insurers watch duration gaps and longevity risk.”
- Analyse the different risks that can threaten a person's human capital
“Longevity risk is the mirror image, arising once human capital has run down and savings must last.”
See also
Practise it
Practise longevity risk until it is automatic: questions that explain every wrong option.
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