Modern Methods and Instruments for Managing Longevity Risk in Pension Plans

Extending the average life span in every next generation is a positive phenomenon - the result of the progress of civilization in the area of working conditions, the level of medical care, etc. However, this process also entails certain risks. Such a threat which can be accurately predicted and calculated and thus also recognized in terms of risk (which can be managed by people) is the longevity risk, or in other words the risk of a longer than expected life expectancy. It applies both to individuals as well as whole generations (demographic cohorts). The longevity risk threatens public pension systems as well as complementary and supplementary systems (individual and company run) as long as they guarantee payment of benefits for life. The cognitive aim of this article is to present the theoretical and practical case studies of selected methods and longevity risk management instruments as well as an attempt to evaluate their effectiveness. The author attempts to address a question whether the use of certain instruments to manage longevity risk would not trigger yet another type of risk - the so-called counterparty risk. It poses threat to each party of a contract that the counterparty will not live up to its contractual obligations.