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What longevity risk?

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Greg Pallone:

Longevity risk as applied to DB arrangements can be accounted for and costs (funding) can increase to accommodate the payment of the pension benefits to longer living members for a longer period of time. However, what about members of a CAP? Longevity risk, or the probability of running out of money during your retirement, is very real for CAP members and a lot of retirement planning needs to be offered these members well before they retire. That, and financial literacy, are the missing pieces in the group benefits industry today. Defined benefit arrangements can simply increase funding to ensure benefit payments–CAP plan members are not even aware of what their own retirement goals are so longevity risk for them is a real, albeit misunderstood. Members who delay retirement, as a growing number are, will also impact the plan sponsor in similar ways by driving up the costs of workplace benefits.

Thursday, August 15 at 12:16 pm | Reply

Calvin Jordan:

Thanks for your comment Greg. Agree completely that in contrast to the small longevity risk faced by DB pension plans, CAP members are in a very different situation. They are in a risk pool of one! For retiring CAP members that do not have sufficient wealth to tolerate this risk an annuity hedging solution may make sense. My article is aimed only at DB pension plans.
Calvin

Thursday, August 15 at 10:45 pm

Herb Whitehouse:

The real risk comes about when investment fiduciaries and advisors don’t take seriously the need for investment policies to support funding policies. Longevity patterns change. But when combined with increasing retirement rates due to a maturing workforce, cash flow patterns rapidly change — and so does funding ratio risk when the investment policy does not conform to the new cash flow reality.

Friday, August 16 at 8:05 am | Reply

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