Mortality Credits: A Primer

Mortality credits are a potentially valuable source of return for longer-lived retirees. They rely on pooling between survivors and other investors, such as those who surrender their contract or those who die early. However the extent of mortality credits available is heavily affected by product design.

The concept of mortality credits is fundamental to understanding the potential value to clients investing in contracts providing longevity protection.

At the simplest level they are a cross-subsidy between groups of longer-lived people, and everyone else. Individuals in a group who survive longer receive amounts (typically paid as a regular income) which are, in part, funded by others in the group. Mortality credits is a common term used to describe these, although they might actually be better described as “survival credits”.

Traditionally, only lifetime annuities have provided access to mortality credits. Increasingly, more innovative forms of retirement products also offer the potential for mortality credits such as Group Self Annuitisation and other non-insured pooled mortality vehicles.

This paper analyses the potential mortality credits available in a range of annuity products, and illustrates the importance of understanding annuity product features, such as liquidity conditions, as these have a material impact on investor returns.