IMF: How The Actuaries Got It Wrong

(April 11, 2012)  —  Longevity risk has been so badly estimated over the past couple of decades that if governments and corporations do not change their formulae, they face costs that could cripple both business and economies, the International Monetary Fund (IMF) has warned.

Calculations made by government and corporate actuaries had been based on the wrong starting point, according to a paper by the IMF this week, and failed to take into account unexpected medical advancements when drawing up mortality tables.

“These risks build slowly over time, but if not addressed soon could have large negative effects on already weakened private and public sector balance sheets, making them more vulnerable to other shocks and potentially affecting financial stability,” the IMF said.

On average, governments and pension providers have underestimated longevity improvements by about three years.

The paper said that if they continued to do so “the already large costs of ageing could increase by another 50%, representing an additional cost of 50% of 2010 GDP in advanced countries and 25% of 2010 GDP in emerging markets”.

In the United States, such misjudgement would increase corporate pension plan liabilities by 9%, meaning huge additional cash injections by the sponsoring employer, the IMF said.

On a global scale, the IMF estimated that the equivalent of trillions of dollars would have to be spent if amendments were not made immediately.

The paper said governments would have to swiftly look at longevity or their own employees’ pension and other general social security payments would spiral out of reach and potentially damage the economy as a whole.

The IMF recommended better education about longevity to the wider public may help alleviate pressure when governments and employers inevitably had to raise retirement ages.

The IMF also suggested risk sharing, but this should include benefits for pensioners decreasing in tough times – an issue that has been discussed in some parts of Continental Europe since the onset of the financial crisis.

Above all, the IMF urged governments and companies to move quickly on the issue. It said: “Measures will take years to bear fruit and effectively addressing this issue will become more difficult if remedial action is delayed. Attention to population ageing and the additional risk of longevity is part of the set of reforms needed to rebuild confidence in the viability of private and public sector balance sheets.”