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Pension plan sponsors are aware of one longevity risk in their plans – the risk that plan members live longer than assumed. There are steps that they have taken to mitigate this risk. Pension liabilities have been valued anticipating future increases in longevity, and some longevity exposure has been transferred to insurance companies through annuity purchases or pension “buy-ins”.
There is another longevity risk faced by plan sponsors that is not as well known – the risk that aging populations will depress investment returns. Academic work has examined the impact of changing population structures on various asset classes, but to our knowledge this has not been connected to the risk that this poses to pension plan finances. Examining this risk is the objective of a research project funded by the National Pension Hub. This article surveys some of the academic literature in this area and poses questions that will be addressed by this research project.
In a search of the academic literature published since 2000, we have found 35 articles that analyze the connection between population structure and equity markets. These articles explore for the relationship between some equity market characteristic, such as a price index, P/E ratio or return, and some characteristic of the population structure, all the while controlling for certain economic variables. These papers use many different population characteristics and economic variables. Also, the underlying data that these analyses use covers many different time periods and many different equity markets. Also, most of the papers find a statistically significant relationship between the population characteristic and the equity market characteristic that the authors use.