Systematic and non-systematic mortality risk in pension portfolios

TL;DR

This paper analyzes how systematic and non-systematic mortality risks affect the initial capital requirements for pension portfolios, highlighting the diminishing impact of non-systematic risk with more members and the persistent significance of systematic risk.

Contribution

It provides a comparative analysis of systematic and non-systematic mortality risks and their influence on pension capital requirements, considering financial risks.

Findings

Non-systematic risk diminishes rapidly with more members.

Pooling reduces required capital per person for small plans.

Systematic mortality risk remains significant regardless of plan size.

Abstract

We study the effects of non-systematic and systematic mortality risks on the required initial capital in a pension plan, in the presence of financial risks. We discover that for a pension plan with few members the impact of pooling on the required capital per person is strong, but non-systematic risk diminishes rapidly as the number of members increases. Systematic mortality risk, on the other hand, is a significant source of risk is a pension portfolio.