To determine required reserves for pension finds in the Netherlands, funds must consider various risk categories and their interdependencies. Reserves should be such that the overall likelihood of underfunding after one year is less than 2.5%. Mortality is one of the risk categories.
In the Netherlands, Milliman consultants distinguish three elements in mortality risk:
1. Process risk – This originates from abnormal adverse variation in insurance results in one year.
2. Trend mortality uncertainty – This covers the uncertainty regarding the longevity trend.
3. Negative stochastic deviation – This covers the risk that estimated mortality rates differ from the actual mortality rates.
The impact of trend mortality uncertainty is relatively large because a good estimate requires a large amount of data. And small changes in the trend can have large effects.
In this article, actuaries Rajish Sagoenie and Gert Maarsen describe in more detail how pension funds in the Netherlands deal with longevity risk and look into current developments, including updates to mortality tables.