Modelling a Dutch Pension Fund’s Capital Requirement for Longevity Risk

Abstract

Longevity risk is the risk arising from uncertainty in the prediction of future mortality. This risk must be faced by pension funds. The legislation for Dutch pension funds prescribes that the pension funds need to keep in reserve a certain level of capital for this risk. De Nederlandsche Bank (DNB), the regulator of the legislation, suggests a method for calculating this capital requirement. In this paper an alternative method is developed, that provides a better insight in the current risk. Moreover, it turns out that the resulting capital requirement from our method is less than half of the capital requirement calculated using the method suggested by DNB.