Projections of New Zealand mortality using the Lee-Carter model and its augmented common factor extension

This paper presents the results from an empirical study on projecting New Zealand mortality. First, we analyse mortality data from 1948 to 2009 to obtain background information for the modelling process. In particular, we examine various aspects of mortality patterns by gender such as the differences across age, declining trend over time, old-age mortality rates, movement of the survival curve, modal age at death, and continual increase in life expectancy. We then apply the Lee-Carter model and its augmented common factor extension to the mortality data and project the death rates and life expectancy. We investigate the optimal starting year for fitting the model, and carry out out-of-sample and residual analyses to assess model performance. The fitted models appear to provide further insight into the underlying mortality trends. In addition, we make use of a hypothetical example of a pension to illustrate potential financial impact of longevity risk.