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From Chapter 6 of Bill Sharpe's RISMAT:

Fixed Annuities

"The financial risk is that you will have a long life in retirement, not a brief one."


"Hence it may desirable to pool 'longevity' risk, with people who die prematurely paying those who live to ripe old ages."


"An insurance policy that provides such risk sharing is called an annuity."

ARC Comment:

Corporate defined benefit pension plans typically divide their expenses into three categories (or buckets).
The categories are usually defined by how close employees are to retirement, which determines this risk of them not being fully funded.
The most critical category is the monthly payments they owe to employees who are already retired.

To reduce the risk of that most critical category, pension plans often purchase fixed annuities.

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