Demographic Risks
Risk of member experience unfolding differently than assumed, particularly member mortality.
Thus far, we primarily focused our risk discussion on economic outcomes. However, demographic risks exist in our actuarial measurements as well.
Two significant demographic assumptions that affect the timing and amount of future pension benefit payments are rates of mortality (including rates of mortality improvement) and rates of retirement. For example, if retirees live significantly longer than currently assumed (longevity risk) or members eligible for subsidized early retirement retire significantly earlier than currently assumed, the plan’s financial condition would weaken and current contribution requirements could be inadequate.
This point is illustrated by the table below, which compares the funded ratios of the retirement plans if we double or remove our assumed rate of future mortality improvement. A funded ratio represents the portion of a plan’s actuarial accrued liability that is covered by its current actuarial assets. It serves as one of many measures that helps to explain the health of a pension plan. The below mortality improvement sensitivities are for illustrative purposes only and may not reflect reasonable assumptions for funding purposes.
In general, open plans (i.e., Plans 2/3) see larger changes in funded ratios than their closed plan counterparts (i.e., Plans 1). This is because the open plans have younger populations, and thus will have a longer exposure to mortality improvement over their remaining lifetimes.
We currently reduce the impacts of these demographic risks by reviewing annual experience and updating these assumptions, at a minimum, every five to six years where appropriate after the completion of a comprehensive demographic experience study. In the area of mortality improvement, we reduce longevity risk by applying assumed mortality improvement on a generational basis. Using this basis, we adjust currently assumed rates of mortality downward slightly each year in the future. For example, we would expect a 70-year-old in 2025 to live longer than a 70-year-old in 2024. The projected rates of mortality improvement we use are based on nationally published tables and informed by professional judgment.
See our most recent Demographic Experience Study for further information on the development of our current demographic assumptions.