Do DB Plans have a maturity like annuities? Or they pay the promised benefit for the lifetime of the participant, so no longevity risk with a DB plan?
Usually the employee is given a choice: Life time income, lifetime income w/ survivor benefits and varying other options… sometimes a lumpsum option too.
Well there was a question (2016 AM Exam) if the longevity risk of a person increases or not if switches from DB plan to DC plan?
I had no idea. OK we may presume the pension plan will be smarter in managing the portfolio than the guy himself, so all kinds of risks are higher with a DC plan than with a DB plan, but my thinking didn’t go there.
The pure fact that the DB plan guarantees you a fixed monthly amount vs you yourself manage the portfolio to earn the required rate of return - IMO - does not affect longevity risk.
A db plan providing a pension reduces longevity risk because you keep getting your $$$ the longer you live. If you did not have the pension, you could run out of money.
The fact the DB plan is smarter or not has no bearing on the question. The question is asking about the longgevity risk of the individual, not the risk of the plan/employer. The plan/employer is still on the hook whether they mismanage the funds or manage it wisely.
OK, your first sentence gives me the clue. Thx!
I kinda don’t like this thing about the Institute. Their reasoning is like so theoretical. Yes I would say that longevity risk would increase on choosing DC plan but I would reason by saying that Mattison would have full discretion over how he wants to manage his money. Even in retirement if he wants, he can take risk, invest in equities for a few years and assuming things work out, it can increase his asset base thereby increasing his longeivity risk.
You have this backwards. If things work out and increased his asset base, he has decreased longevity risk… But that’s after-the-fact (ex-post). Also, that increase asset base could still dwindle on a market collapse and his longevity risk is back in jeopardy.
Generally, removing market risk is the answer to longevity. I work for a life insurer, this is what we do 
I agree this question and the explanation is not 100% clear, and since it was on an actual exam, I’m not happy. Because on levels 1 and 2 at least the exam questions were 100% clear, as opposed to some mock questions.
But this was on the exam…
But wouldn’t an increase in asset base through investments at your own discretion lead to an increase in longevity risk ? If asset base appreciates, there’s a higher chance of you outliving your assets.
No
Still backwards. Longevity risk means you run out of money because you live too long… Let’s say you live to age 120 as an extreme example.
of course. I screwed up. I’m gonna go get some sleep. I’m turning dumber by the second.