Mortality rates have seen significantly larger systematic improvements than anticipated over the past decades. These mortality improvements are not certain across time but show variations. This global phenomenon has imposed a major challenge for current retirement systems in providing sustainable retirement incomes. The latest global financial crisis, low-interest economic environment and changing regulatory frameworks also exacerbated this challenge. It is, therefore, very important to develop better models for risks and to seek feasible solutions to efficient risk management. This motivated the 2013 Pension Research Council Symposium at the Wharton School of the University of Pennsylvania. This book comprises research papers presented at the symposium. It investigates key risks that threaten current retirement systems, including capital market and model risk, longevity risk, and regulatory risk. The analyses are thorough and the editors and authors present proposals for the design of a retirement system that can withstand these shocks and provide retirees with sustainable and stable retirement incomes.

Part I of this book is focused on managing capital market risk and model risk for pension funds. It is widely observed in empirical studies that the normality assumption results in an underestimation of the tail risk of long-term equity returns. For example, as shown in Chapter 4, higher-than-40% declines in the global equity market should be seen only once every 540 years based on the normality assumption of equity returns; however, we have seen two such large declines during the past 115 years. Hence, such large declines have occurred substantially more frequently than predicted. In terms of improving the method of modeling equity risk, a structural regime switching model that takes into account key macroeconomic variables is used in Chapter 3 to better capture the tail risk of equity returns. Chapter 4 is focused on limitations of Monte-Carlo simulations that are frequently used for projecting future equity returns and shows that Monte-Carlo simulations are very sensitive to the long-term expected growth rate. These findings have very important implications for risk management in pension funds. Discussions on capital market risk management strategies are also presented in this part, i.e., the recently popular liability-driven investment strategy and feasible hedging and de-risking tools are discussed in Chapter 2.

Longevity risk is investigated in Part II of this book. Since the work by Lee and Carter in 1992, many stochastic mortality models have been developed for measuring mortality improvements. Chapters 5 and 7 provide a thorough review of a broad range of widely used stochastic mortality models for quantifying longevity risk. In particular, the timeline development for stochastic mortality models in Chapter 5 is very intuitive and is strongly recommended to readers that are new to the longevity risk field. Chapter 5 takes into account important aspects of these models, such as robustness and feasible applications to risk management, in addition to goodness-of-fit and prediction accuracy. Mortality heterogeneity is another important factor that generates variability in mortality experience and affects pension funds, but in prior studies this has not been taken into account together with systematic mortality improvements. Chapter 7 combines mortality heterogeneity and systematic improvements into a coherent framework and investigates their impact on solvency and tail risk for pension funds. This part also provides rich discussions on issues associated with managing longevity risk for pension funds, e.g., Chapter 6 develops a risk management framework, under which longevity risk, corporate finance, and financial economics are considered together; Chapter 8 investigates the capital market solution of managing longevity risk and compares this method with other risk management strategies.

Part III discusses regulations and policies for pension funds and how they can impact the performance across countries and over time. Chapter 9 overviews the history of regulations on pension funds and analyzes the effectiveness of some regulatory changes in terms of risk control. Some regulations are shown to be incentivizing short-term investments. The results provide valuable insights into the design of pension regulations. The recent changes in European Union pension regulations are evaluated in Chapter 10, where the authors hold positive views about these changes and proposals. In particular, based on the proposed risk metric of ‘the probability of failing to provide stable retirement income’, Chapter 10 views these changes as removing an obstacle to labor mobility, increasing market transparency, providing intervention signals, and merging regulations between different sectors. Despite these positively viewed developments in pension regulations, Chapter 11 calls for more attention to extreme risks in pension funds, in particular to adverse consequences of extreme shocks. The recommended regulatory change is to increase the risk buffer for pension funds.

The authors and editors have done very thorough investigations on key risks for pension funds in the first three parts. Given the many stochastic models reviewed in Part II, it would have been better to link Part I and Part II by including model risk analysis also for longevity risk.

The last part of the book is focused on proposing strategies for plan sponsors in the face of the many challenges in providing sustainable retirement incomes. After emphasizing the fact that ‘today's path for pension is unsustainable’, Chapter 12 makes recommendations to the conventional approach, e.g., including a sustainable risk budgeting process and using longevity insurance. Optimal funding strategies are analyzed for pension plan sponsors in Chapter 13 using a holistic approach that takes into account other investment projects or business operations. This corporate finance approach is shown to have many advantages and is predicted to be widely adopted in the future.

Overall, this book takes into account a coherent range of most critical risks that our current retirement systems are faced with and provides useful recommendations in terms of risk management strategies, regulatory changes, corporate investment strategies, etc. I strongly recommend this book to JPEF readers.