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Basis Risk and Pension Schemes: A Relative Modelling Approach

Andrew Hunt and David Blake

For many pension schemes, a shortage of data limits their ability to use sophisticated stochastic mortality models to assess and manage their longevity risk. In this study, we develop a relative model for mortality, which compares the evolution of mortality rates in a sub- population with that observed in a larger reference population. We apply this relative approach to data from the CMI Self-Administered Pension Scheme study, using UK population data as a reference. We then use the relative approach to investigate the potential differences in the evolution of mortality rates between these two populations and find that, in many practical situations, basis risk is much less of a problem than is commonly believed.

Keywords: Mortality modelling, age/period/cohort models, relative.