The financial implications of rising longevity, in particular with regard to pensions, pose significant challenges to society. The re-allocation of the financial burden among governments, businesses, and individuals will significantly affect pension systems.
The upward trend in life expectancy and the consequent aging population has led to large unanticipated retirement costs for businesses and governments, particularly in developed countries.
In response to government initiatives, corporate sponsors have closed their defined benefit pension schemes, and moved employees into defined contribution schemes—thus shifting investment and longevity risk onto individuals.
To deal with the legacy of previous commitments, managers have created a range of new solutions for the financial markets, from hedging liabilities to passing all or part of the risk and responsibility to specialist third-party providers.
A huge increase in life expectancy is one of the great achievements of the human race over the past two centuries. Increased longevity has transformed both individuals’ lives and their societies, with the most marked changes taking place in the developed world. Actual increases in life expectancy have been far more substantial than previously projected, with the result that governments, businesses, financial markets, and individuals must radically readjust their plans.
Moreover, the current trend shows no sign of leveling off. For example, between 1981 and 2000 the life expectancy for 65-year-old males in the United Kingdom increased by approximately three months for every year, and future life expectancy is widely expected to continue to increase. Therefore, it is increasingly important that governments, businesses, and individuals consider the economic, societal, and financial implications of an aging society in diverse but important policy areas such as pensions, health care, and long-term care provision. For example, pension liabilities increase by 3% or more for every added year of life expectancy.
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