18 March, 2019 09:30
Photo : Freepik
Aon offers a longevity index customized to help small defined benefit plans to better manage their risks.
To help its customers to adjust their assumptions longevity risk, Aon provides the sponsors of pension plans from small size to use an approach imported from his activities in the United Kingdom : the Model of the longevity of Aon. This model allows to assign an index, a personalized longevity to each member of a defined benefit plan from data géodépendantes and indicators of socio-economic status. These data make it possible to more closely approximate the mortality rate of a particular plan.
“The enterprises of average and small size only had very few tools to adjust their assumptions in a more precise way “, explained Éric Lepage, a partner and member of the consultation team in pension plans, from the national team longevity, and team of settlement risk.
“The socio-economic factors of participants are extremely useful to distinguish, for example, white-collar workers blue-collar workers, or a business sector to another “, says the actuary. According to him, the profile of mortality can vary markedly between some trades. “In forestry, the profile will vary between employees engaged in wood cutting and sales staff. “
Segmentation by zip code
If the statistics of the plan are not fully reliable, Aon may use a segmentation by zip code. “We will involve the postal code of each individual in a socio-economic class that can cover more than one region. A region of Montreal and another in Toronto with a similar profile will be associated with the same socio-economic category “, illustrates Mr. Lepage. A detailed study of the mortality according to categories allows you to find an adjustment factor that is customized for each participant, said Mr. Lepage.
“There are over 850,000 postal codes in Canada. They bring together an average of 15 to 20 households each. A zip code can indicate the level of participant’s income if he resides in the city or in the countryside, close or not to a hospital, etc, better access to health care can be life saving. “
Medical progress… with a grain of salt
Medical advances can be an indication, but the actuary must put it in perspective, think Eric Lepage. “Less people smoke, but there in return a very pronounced increase of obesity and risk of pandemic diseases that respond less well to medication. Each progress has its corollary. Once you have eliminated a disease, it is necessary to work even harder to eliminate those which remain. “
Elements, the outcome of which is unknown come to complicate the work of actuaries. Mr. Lepage noted, in this sense, the slowdown of the increase of life expectancy. Observed in the United Kingdom, the United States and Canada, this slowdown is a factor to watch closely : “Is this an aberration statistics in the short term or a long-term trend? “.
An economic model
There are other solutions that this model to isolate the longevity risk, but they are more expensive. The proponent may choose to resolve their issue by buying a group annuity or longevity swaps to fully hedge this risk.
These solutions are more affordable for plans that have several thousands of employees, think Mr. Lepage. These plans have more reliable statistics than those of smaller schemes, ” he adds.
These data facilitate the actuarial valuation. This is the case, for example, of the municipal programs that have opted for an equal participation to the pension fund between the employer and the employee. These funds to ensure intergenerational equity, and avoid the shoveling of the costs to future generations, ” says Eric Lepage.