Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 418

Protect retirement savings from longevity risk by pooling

A feature of life expectancy is that over half the people of a certain age will live longer than their life expectancy. Retirees using these widely-published figures as a reference point when planning how to spend their savings, are more likely than not to run out. The chart below shows how likely someone retiring today is to pass away at each age into the future.

Source: Australian Life Tables (ALT) 2015-17 with 25-year improvements.

More prudent retirees who plan for their savings to last longer than life expectancy can reduce the risk of outliving their savings, but this comes at the expense of a more frugal retirement.

In the example above, a 65-year-old male has less than a 1 in 10 chance of living past age 97. However, if the retiree spread out his spending so that his savings lasted to age 97, the annual retirement income from his savings might be around 20% lower than if he’d planned for life expectancy (assuming savings are spent over the planning horizon and a 3% p.a. real net investment return). It is this uncertainty that makes planning how to spend your retirement savings so difficult.

There is a growing acceptance from super funds that current account-based retirement products, where members bear all the risks (including longevity risk) lead to poor outcomes for many members. With prompts from the government, forward-looking funds are considering retirement products that pay members an income for life.

Benefits of pooling

Pooling a group of retirees of the same age will tend to have a more reliable distribution of ages at death. As the pool gets larger, the distribution of lifespans around the mean is more predictable.

The benefits of pooling can be passed on to retirees in a number of ways. Super funds can provide lifetime income products by pooling together retirees’ capital through a product known as a group self-annuity (GSA). With enough members, they can reduce the uncertainty for individual in the group.

How many members make a pool?

To understand whether a pooled product is viable for a particular super fund, it is necessary to know what size of pool is needed to reduce the longevity risk for members.

The benefit payments made to members in a GSA are determined based on assumptions about how long members will live. Benefit payments are then adjusted to the extent that the actual experience of members differs from those assumptions.

To take a simplified example, consider a GSA with 500 male members, all 70 years old. It can be expected that 493 would survive to the following year, and the projected payment in the following year is based on this playing out.

If fewer members pass away, then the benefit payments going forward are reduced, as benefits are being paid to more members than assumed. The greater the deviation from the assumed number of survivors, the larger the adjustment that is needed to members’ benefits.

This is why the size of the pool is important. The larger the pool of members, the less likely it is that assumptions will be deviated from, as a proportion of the total membership. Adjustments to members’ benefits due to mortality experience are therefore likely to be smaller for larger pools of members.

The chart below shows the impact on members’ benefits when fewer members than assumed die in a particular year.

It considers a hypothetical GSA where benefit payments are adjusted each year in line with experience and looks at the reduction the payments members receive year-on-year as a result of mortality experience differing from the assumptions. It assumes all other experience, such as investment returns, is in line with what was assumed when payments were set.

For example, for the GSA product with 500 members, there is around a 1 in 10 chance that the actual number of survivors is 496 rather than 493. With more survivors the annual payment for each member would need to be reduced by 0.7% in the following year. In smaller pools, it only takes a few more survivors in a given year to drive a material change in benefits for all members.

Source: Challenger analysis. Assumes a pool of 70-year-old male members, with fixed annual benefit payments, no death or withdrawal benefit and a net investment return of 5.0% p.a. Mortality rates in line with ALT 2015-17 with 25-year improvements. The number of survivors for a given probability is rounded to the nearest whole number of lives.

Consistent with other research, this suggests that a pool of at least 10,000 members would be preferable to reduce the risk of a member’s payments falling significantly from one year to the next due to mortality experience.

Of course, members of super funds aren’t all the same age when they retire, and their health and longevity traits will vary widely too. This heterogeneity can lead to greater volatility in payments.

For super funds that are confident of reaching the scale needed to operate a pooled retirement product, a second issue is the time needed to get there. If mortality experience is passed on continuously (e.g. in annual benefit indexation) to members, then it is likely they will experience volatile benefit payments in the first few years of the product’s life.

Reserving as an alternative approach

Rather than letting members bear all the volatility of benefit payments that can result from a pool that is too small, super funds can look at other ways to manage that risk.

Like a traditional defined benefit fund, super funds could hold reserves to support a pooled product, either permanently or until the pooled product reaches scale. The reserves can be used to smooth benefit payments and reduce the volatility for members.

Equity for other classes of members requires that reserves are established from part of the pooled product members’ initial contributed capital. This will necessarily reduce the benefit payments members receive, at least initially. The reserves will need to be managed which can add costs. Added complexity can reduce the transparency to members, making communicating with them more difficult.

It is also possible for super funds to insure longevity risk to provide greater certainty for members. In a longevity swap, a counterparty takes on this risk for the fund, for a cost, to remove members’ exposure to longevity risk.

An alternative to a pooled product is for super funds to offer a holistic retirement product that includes an account-based pension and a lifetime income stream, which offers both flexibility and longevity risk protection for members.


Pooled retirement products can significantly reduce or remove personal (idiosyncratic) longevity risk, providing better outcomes for members than current account-based products. However, to be effective, pooled products need sufficient scale and it can take time to get there.


Doug McBirnie is a General Manager and Senior Actuary at Accurium. This article contains general information only and is not intended to be financial product advice. No warranty is given on the information provided and Accurium is not liable for any loss arising from the use of this information.


Dave Roberts
July 29, 2021

Simple answer. Move all Super to pooled govt fund. Largest pool smallest longevity risk. Smallest fees due to size. Only problem is all those in the financial industry making big money from fees would be unemployed. Most Australians have no interest in their super and very limited ability to shape plans and make choices.

July 29, 2021

In absolute terms, the "potential reduction in annual benefit" difference between 500 and 10,000 member pools of -0.7% and -0.3% is negligible! No quantitative estimate is presented for the cost of reserving, smoothing or insuring this potential volatility, which will GUARANTEE a reduction in ALL members irrespective of a pool size (and may even exceed the figures in the article...). Furthermore, there is roughly an equal 1 in 10 chance that actual survivors are 490 (not 493 expected) in a 500 pool size. In such an event there will be a positive adjustment, likely exceeding 0.7%, because full reserves are released into the pool (rather than gradual allowance for expected release). This means there is a similar possibility of very large positive increases in benefits as a result of mortality experience in a small pool. Yes, in small pools, and at the outset of a new pool, there is a very real risk of volatile experience. The marginal negative mortality adjustments presented here will however be dwarfed by investment experience adjustments, because investment experience will NOT be in line with what was assumed when payments were set (as assumed in the analysis). The average 10yr annualised volatility of Balanced option returns of the 50 largest superannuation funds is almost 6%, which is 10-20 times more in magnitude than the minor mortality adjustments presented. What the analysis does show is that the potential reduction in benefits starts stabilising for pool sizes upwards of 500 members. And that there is a very marginal absolute change in potential reduction in benefits for increasing pool size beyond this number.


Leave a Comment:



Digging deeper into planning for retirement spending

Achieving a sufficient retirement income portfolio

Three steps to planning your spending in retirement


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.


Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.