Early retirements

Members of defined-benefit pension schemes can often retire early if they are in poor health.  Unsurprisingly, such ill-health retirements exhibit higher mortality rates than those who retire at the normal scheme age.

Over time, however, the information on the health status of a pensioner is often lost.  When administrators are changed, for example, the original reason for retirement may not be migrated across onto the new payment system.  This poses a dilemma: we know that the reason for retirement will be a material risk factor, but we often won't know the reason codes for all pensioners.

One solution adopted by the CMI in the U.K. is to assume that everyone whose pension began before a certain age has retired in ill health.  This approach will naturally mis-classify some people, such as dependent spouses, whose pension started for a reason other than their own health status.  However, this approach can still be a useful proxy to health status, as shown in Figure 1 below.

Figure 1. Kaplan-Meier survival curves for male pensioners retiring early (before age 50) and normally (at or after age 50)

As figure 1 shows, people whose pension started before they reached age 50 have a lower chance of surviving to any given age compared with people whose pension started after age 50.  Thus, even where the actual information on health status at retirement has been lost, a useful proxy can be reconstructed for modelling.