background swath


Longevity Assumptions – Don’t Let Them Kill You

  • Contributors:
  • Dan Scholz, Director, Investment Strategies
Longevity Assumptions

Around the office, we have found longevity to be an engaging topic. A conversation about expected lifespans can quickly attract a small gathering of people observing and participating in the dialogue. Why? One answer is that it could be very primal – people are genetically programmed to think about survival, how long they might live, and what factors influence their lifespan.  This might be why the conversation inevitably moves to the causes of mortality. Why do different demographics (e.g., blue/white collar, income level, home zip code) seem to have different mortality rates, and what causes those differences? No doubt there is enormous opportunity to confuse correlation with causation in such conversations, but there is another reason the halls of NISA have a natural curiosity about longevity – it is a direct contributor to pension liability risk.

The connection is obvious: how long a retiree lives determines how many benefit checks must be paid. As such, longevity assumptions impact:

To best manage pension risks, it is important to accurately measure all three liability attributes. Research into how estimates of longevity vary across different demographic classifications has revealed a surprisingly large impact on these measures. Lifestyle choices and the social ladder realities of access to health care are drivers of differences in longevity across demographics and the magnitude these differences have on longevity can be quite significant – in the range of 7 to 10 years. This Washington Post article describes some even more dramatic and surprising differences such as two counties in the same state (Virginia) having a life expectancy difference of 14 years!


In a recent SOA newsletter article co-authored with ClubVita1, we investigate how different demographic classes can impact liability measures:

The chart above shows that the least healthy/wealthy demographic would be over-valued by ~15% if standard mortality tables were used, while the most healthy/wealthy would be under-valued by ~10%, a swing of 25%! The impact on interest rate sensitivity measures is even larger: The amount of DV01 (dollar sensitivity to a 1bp movement in discount rate) for the least healthy/wealthy would be over-estimated by ~20% by using standard mortality tables, while the most healthy/wealthy would be under-estimated by ~15%, for a full swing of 35%.

We found the size of these differences to be quite surprising, and you may too.

Why does this matter to you?

Standard mortality tables (such as SOA’s Pri-2012) reflect national averages, which may not represent the true demographics of your plan participants. Having a precise estimate based on your plan demographics allows for a better estimate of funded status and allows you to better manage the interest rate risk and yield curves exposures of your liability. Some thought should be given to the appropriateness of standard tables before simply using them by default.

If you are considering a small balance buyout, this sub-group of plan participants is likely associated with shorter longevity than average as they tend to be representative of lower income demographics. Standard mortality assumptions may materially over-value the liability attached to these participants and, accordingly, falsely convey better buyout economics than reality. For a better evaluation, we strongly suggest you revisit the longevity assumptions on this sub-group.

Lastly, if you would like to exchange thoughts on what could be done with your specific plan, we would welcome a conversation. As mentioned, we have a natural affinity to longevity conversations.

1 If you don’t like to read, we also hosted a webinar covering much of the same.

Download the PDF

To download a PDF version, please click here.

Disclaimer: By accepting this material, you acknowledge, understand and accept the following:

This material has been prepared by NISA Investment Advisors, LLC (“NISA”). This material is subject to change without notice. This document is for information and illustrative purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation. This information is provided with the understanding that with respect to the material provided herein (i) NISA is not acting in a fiduciary or advisory capacity under any contract with you, or any applicable law or regulation, (ii) that you will make your own independent decision with respect to any course of action in connection herewith, as to whether such course of action is appropriate or proper based on your own judgment and your specific circumstances and objectives, (iii) that you are capable of understanding and assessing the merits of a course of action and evaluating investment risks independently, and (iv) to the extent you are acting with respect to an ERISA plan, you are deemed to represent to NISA that you qualify and shall be treated as an independent fiduciary for purposes of applicable regulation. NISA does not purport to and does not, in any fashion, provide tax, accounting, actuarial, recordkeeping, legal, broker/dealer or any related services. You should consult your advisors with respect to these areas and the material presented herein. You may not rely on the material contained herein. NISA shall not have any liability for any damages of any kind whatsoever relating to this material. No part of this document may be reproduced in any manner, in whole or in part, without the written permission of NISA except for your internal use. This material is being provided to you at no cost and any fees paid by you to NISA are solely for the provision of investment management services pursuant to a written agreement. All of the foregoing statements apply regardless of (i) whether you now currently or may in the future become a client of NISA and (ii) the terms contained in any applicable investment management agreement or similar contract between you and NISA.

Agree to Terms

Please review and accept the following to proceed. I have read and agree to the Terms of Use, Disclaimer, PSRX Disclaimer and Privacy Policy. I am either (i) an investment professional and an employee of an institutional investor, or a consultant to an institutional investor, or (ii) an employee of, or a student in, an institution of higher learning and I am involved in the study, research or teaching of subjects related to investments, finance, or economics. I reside in the United States or Canada. I understand that the information is not and should not be regarded as investment advice or as a recommendation regarding a course of action. By clicking “Accept” below, you hereby acknowledge, understand and accept the foregoing.