Longevity and adjustment in pension annuities, with application to Finland

Abstract

The aim of this paper is twofold. First, the improvement in adult mortality in Finland is studied. Lee-Carter (LC) Poisson log-bilinear model is used for mortality forecasting. Secondly, the paper studies how the pension annuities are adjusted to unexpected mortality pattern. A formula for funded plan is proposed. Application is made with Finnish mortality rates predicted using the LC model.

Keywords:

• Poisson regression
• Mortality forecasting
• Population aging
• Pension annuity

The author is grateful to the referee for providing several insightful suggestions which improve the manuscript. The author thanks Christina Lindell (Finnish Centre for Pensions) for providing valuable information on the Finnish adjustment factor, Göran Högnäs and Margrét Halldórsdóttir for reading the manuscript. Financial support from the Research Institute of Åbo Akademi Foundation is greatly acknowledged. Thanks are also due to the Central Pension Security Institute, the Social Insurance Institution in Finland, and the Human Mortality Database for providing the corrected data.