How do pension providers project your annual pension, since they don’t know when you are going to die?
In: Economics
Pensions are essentially long term bets by pension companies. They promise to pay you a pension from retirement until you die. This means if you live until 110 they will make a massive loss. However, if you drop dead of a heart attack aged 70 they will gain.
This sounds like high risk stuff until you realise they have thousands of pension holders so as long as they project future life expectancy accurately then they are almost certain to have an average spread of life expectancies and so be able to cancel out any losses.
So essentially something that would be a high risk for an individual person – ensuring they spent their savings in a way that both made sure they had enough to last them until death, without having to live on very little in case you live to 110 – is eliminated because the risk is mutualised. It does mean the pensions of the unhealthy and unlucky subsidise those who live longer though.
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