• Improvement on Mortality Predictions Using the Lee-Carter Model and Its Application to A Defined Contribution Pension Plan

Abstract

Accurately predicting mortality is central in reducing longevity risk. Among various mortality models, the Lee-Carter model (Lee and Carter 1992) is the most popular and has been widely applied and discussed. One criticism of the Lee-Carter model is that it assumes a fixed rate of decline (improvement) in the logarithm of mortality rates when using the common singular value decomposition (SVD) approach, and does not capture the trend of mortality improvements over time. This study proposes using a time adjustment weight to enhance the prediction performance of the Lee-Carter model, and to capture the trend of mortality improvements. Additionally, we examine the effect of different mortality predicttion methods on the optimal asset allocation for a Defined Contribution pension plan. For a given contribution rate, an aggressive investment strategy is appropriate when considering the trend of mortality improvements.

Keywords: Lee-Carter Model, Time Adjustment, Defined Contribution, Asset Allocation