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In a rich, calibrated life-cycle model, we show that well-designed mandatory pension plans significantly improve the welfare of individuals procrastinating on savings, and even improve most rational individuals' welfare through a return tax advantage and fair annuitization. For a group of heterogeneous savers, in terms of preferences and sophistication, the best plan has contributions of 10% of income from age 30, a glidepath investment strategy, payouts following a variable lifelong annuity, and options to choose a different investment strategy and to modify the annuitization feature. This plan generates an average welfare gain of $175,000 per individual. [ABSTRACT FROM AUTHOR]

Many pension schemes offer annuities pooling mortality risk across members. Such pooling has been criticized for having a regressive bias benefitting risk classes with the longest expected longevity. However, knowledge on mortality risk unfolds over the life‐course, and it is optimal for risk averse households to annuitize all old‐age consumption already as young buying pooled contracts, even if fair annuities are available later in life or risk class is private information. Borrowing constraints impair such frontloading but are lessened by a mandated pooled annuity targeting the middle‐aged, improving welfare for all risk classes and the first‐best allocation may be implementable. [ABSTRACT FROM AUTHOR]

We analyze individual annuitization decisions at retirement in an environment with mandatory participation in a funded pension pillar and low average annuity price. Using administrative data from a large Swiss insurance company over the period 2011–2015, we document that, even in this favorable environment, only 42.7% of the retirees fully annuitize, against 45% taking full lump sum. We show that individual annuitization decisions strongly respond to financial incentives, measured by the Money Worth Ratio, and to the tax rates on annuity and lump‐sum payments. Lump‐sum payments are more common among French‐ and Italian‐speaking individuals. Using Survey of Health, Ageing and Retirement in Europe data, we show that French‐ and Italian‐speaking Swiss are more likely to leave inheritance—thus suggesting that preferences for bequests may affect annuitization decisions. Finally, we provide evidence of asymmetric information, using the unused observable test, to show that individuals living in high mortality municipalities are less likely to annuitize and more likely to cash out their pension wealth. [ABSTRACT FROM AUTHOR]

Following New York’s highest court’s reinstatement of New York Insurance Regulation 187 in October 2022, consumer advocates have been hopeful that customer-focused standards supporting client best interest and only suitable products would next be adopted in California. As it happened, the California Department of Insurance had concerns over NAIC’s Model Annuity Suitability Regulation not going far enough to place the buyer’s interests above those of the seller (the agent or the carrier) and was inspired to press for New York-style regulations covering not just the sale of annuities but also life insurance. While 36 states have (as of April 2023) adopted the NAIC regulation, California has yet to do so, but is obligated to adopt at least minimum standards by 2025 or be in peril of federal intervention. The timing seemed appropriate for enhanced protection for consumers buying cash value life insurance and annuities. But during California’s harsh winter and early spring, strong headwinds pushed hard on more than its fragile climate. [ABSTRACT FROM AUTHOR]

This study analyzed a hypothetical fixed-index annuity (FIA) contract linked to a 5 percent volatility-controlled index (VCI) and compared its performance with a traditional FIA linked to the S&P 500 Index, the stock benchmark itself, and a corporate bond benchmark. The simulation results showed that the FIA linked to the 5 percent VCI outperformed the traditional FIA, the bond benchmark, and enjoyed a higher sharp ratio than the stock benchmark. Risk parity, VCI, and the other factors contributing to the outperformance were studied. [ABSTRACT FROM AUTHOR]

"It is not in the stars to hold our destiny, but in the tax benefits." Californians are accustomed to the occasional earthquake, technically the movement of tectonic plates far below the earth's surface. Most are benign (we stir our coffee with a 5.4 reading on the Richter scale), but a few are significant. In New York, the life and annuity industry--and resident consumers of insurance products--experienced a different kind of tectonic movement in the confirmation of new Client Best Interest and Product Suitability rules governing the sale of insurance products in New York. ("It's not in the stars to hold our destiny but ourselves" is a well-known Shakespearean quote about fate and destiny. The quote similarities are significant!). [ABSTRACT FROM AUTHOR]

We show that the supply of U.S. life annuities is constrained by interest rate risk. We identify this effect using annuity prices offered by life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management—conditional on the effect of adverse selection—accounts for about half of annuity markups, or 8 percentage points. The contribution of interest rate risk to annuity markups sharply increased after the Global Financial Crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment. [ABSTRACT FROM AUTHOR]

Longevity crucially affects demand for pensions, insurance products and annuities. Consistent empirical evidence shows that women have historically experienced lower mortality rates than men. In this article, we study a measure of the gender gap in mortality rates, we call "Gender Gap Ratio", across a wide range of ages and for four countries: France, Italy, Sweden, and USA. We show the stylized facts that characterize the trend of the Gender Gap Ratio, both in its historical evolution and future projection. Focusing on an example temporary life annuity contract, we give a monetary consistency to the Gender Gap Ratio. We show evidence that a Gender Gap Ratio that ranges between 1.5 and 2.5, depending on age, translates into a significant reduction of up to 23% in the benefits from a temporary life annuity contract for women with respect to men, against the same amount invested in the life annuity. The empirical evidence discussed in this article documents the crucial importance of working toward a more widespread demographic literacy, for example, a range of tools and strategies to raise longevity consciousness among individuals and policy‐makers, in the framework of gender equality policies. [ABSTRACT FROM AUTHOR]

This paper studies the valuation of equity-linked investment products embedded with a high-water mark (HWM) fee structure. Under the HWM fee structure, the insurance company charges threshold fees at a constant rate from the policyholder's account whenever the account value is lower than a pre-specified level, and levies HMW fees at another constant rate whenever the account is hitting new record highs that are higher than another pre-specified level. The dynamics of the logarithmic value of the policyholder's account, before fees, is assumed to follow either a two-sided jump-diffusion process with double exponential jumps, or a down-ward jump-diffusion process with exponential jumps. For the two-sided jump-diffusion model with HWM fees, using the Wiener–Hopf factorisation theorem and the duality lemma, we derive an explicit expression for its potential measure. For the down-ward jump-diffusion model with both threshold fees and HWM fees, we are facilitated with the excursion theory to derive an explicit expression of the potential measure. Using the above newly derived potential measures, we are able to obtain formulas for valuing the equity-linked annuity under the HWM fee structure. Finally, we illustrate our results with some numerical examples. [ABSTRACT FROM AUTHOR]

One crucial decision made at retirement in Chile is whether to acquire an annuity or a phased withdrawal (PW) scheme. Annuities, unlike PW, do not allow for inheritance and provide smaller initial pension benefits while protecting against longevity and capital market risks. If preferences show decreasing absolute risk aversion (DARA), then an annuity (insurance) should be considered an inferior good. We test this hypothesis on Chilean data using a binary choice model. Our results reject the DARA hypothesis for the whole sample. However, after splitting the sample into low- and high-income groups, we find that the former have increasing absolute risk aversion (IARA) behavior, whereas the latter have DARA behavior. These findings suggest that policy programs encouraging retirement savings, such as tax breaks and subsidies, should be approached with caution depending on the balance of high and low-income individuals, particularly in less-developed economies. [ABSTRACT FROM AUTHOR]

This paper examines the implicit healthy life expectancy used for actuarial calculations in some selected biometric data sets from the US, Australia and China. We are interested in checking the demographic/epidemiological coherence of these data sets because this health indicator is rarely presented when authors build their biometric data sets, nor when they are used to calculate long-term care insurance (LTCI) and life care annuity (LCAs) premiums, nor when they are employed in research articles to estimate the future demand for LTC services. We follow a methodology based on multistate life table methods that enables us to obtain a life expectancy matrix for individuals on the basis of their initial health state. We also present some additional indicators of longevity, mortality and morbidity, these being the median age at death, the interquartile range, the weighted modal age at death, the mortality ratio and the implicit LTC prevalence rates broken down by health state. We find several weaknesses that highlight the difficulty involved in building the biometric data sets needed to make an actuarially fair valuation of the premiums for LTCI and LCAs. We also verify the existence of the so-called "male–female health-survival paradox". From the perspective of a potential purchaser of this type of insurance products, disclosing and explaining the summary measures of health and longevity would make it easier for them to understand the need to protect themselves against the cost of possible LTC services and also make the computation of the premiums more transparent. [ABSTRACT FROM AUTHOR]

This article is a review of Michael Otsuka's book, "How to Pool Risks Across Generations: The Case for Collective Pensions." The author discusses the importance of pensions in applied ethics and argues that collective pensions, based on the principle of reciprocity, offer the best way for workers to maximize their expected pension income while respecting freedom and equality. The book covers different forms of pensions, such as collective defined contribution pensions, funded defined benefit pensions, and unfunded pay as you go pensions, and explores how they can address issues such as longevity risk and investment risk. The author concludes that collective pensions can be justified on grounds of reciprocity and provides a practical guide to understanding different pension schemes. [Extracted from the article]

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The stability of income payments in a pooled annuity fund is studied. In those funds, members receive a fluctuating income depending on their experienced mortality in exchange for their pension savings. The focus is on describing the influence of different initial savings on the ability of the fund to provide a stable income in retirement. Because of this, members coincide in their characteristics except for their initial savings. We identify a term, which we dub 'implied number of homogeneous members', that directly links the initial savings to the size of the income fluctuations. Our main contribution is the analysis of this term and the development of a criterion to answer the question of whether or not a given group of same-aged people should pool their funds together. [ABSTRACT FROM AUTHOR]

Defined contribution retirement pension systems need to improve the level and stability of payments as pensioners age. Longevity risk pooling is key, but so is flexibility to satisfy members' individual needs and preferences. We propose a tontine construct as a flexible and cost-effective investment option for the Chilean pension system. Payouts are for life, but variable since there are no explicit guarantees. Our proposal provides transparency, investment flexibility, and higher expected income streams than any of the existing options available to the country's pensioners. Importantly, it does not distort the existing investment and annuity markets; on the contrary, it complements them. Additionally, it provides a means to offer a form of longevity insurance even if insurers are unwilling to supply it. Furthermore, it is in line with the movement of many countries toward promoting longevity-risk sharing within their defined-contribution systems. [ABSTRACT FROM AUTHOR]

This article discusses the topic of longevity risk and capital markets, focusing on the 2022-2023 update. It highlights the increasing importance of longevity risk and related capital market solutions in academic research and the life market. The article mentions various investment products created by the re/insurance industry and capital markets, such as mortality catastrophe bonds and longevity bonds. It also provides a summary of nine academic papers presented at the Longevity 17 conference, covering topics such as retirement income solutions, equity release mortgages, health inequalities, mortality forecasting, and long-term care in Taiwan. The article concludes by mentioning future conferences and their associated special issues. [Extracted from the article]

Research and product development efforts aimed at addressing retirement income needs have generally been focused on the accumulation side of financial planning. However, innovation and product development on the decumulation side of the equation has been limited. In this article, we utilize an asset allocation model for retirement that can include non-traditional investments to demonstrate how annuities are an integral component of a multi-asset portfolio, aiding in the management of risks unique to retirees and near-retirees. For optimal decumulation allocation, we propose a methodology that maximizes a measure of household financial well-being that considers the two most important, yet often conflicting, objectives in the decumulation phase of the retirement: a) minimizing shortfall risk, and b) maximizing potential bequest. We use this model to demonstrate how annuities could be a prudent addition to a portfolio of traditional stocks and bond investments to better manage sequence of returns or sequence of cash flows risk. [ABSTRACT FROM AUTHOR]

We examine the behavior of Canadian life annuity prices by measuring how quickly and fully they respond to changes in market interest rates. The price responses, though not immediate, start relatively quickly and become more complete over time. Over the whole sample period, the responses appear to be asymmetric – annuity providers generally raise prices faster when interest rates decline than reduce prices when the opposite occurs, which is disadvantageous to annuity customers. In addition, we find unusual annuity price behavior during the period of the 2008 financial crisis. [ABSTRACT FROM AUTHOR]

Many economies have recently adopted the defined-contribution retirement financing system, but one disadvantage of this system is that retirees have to bear longevity risk. As a result, several economies have also introduced the public annuity plans. We analyze the similarities and differences between voluntary public annuity with ceiling (VPAc) plan and mandatory public annuity with flexibility (MPAf) plan that are empirically observed. Introducing either plan reduces the severity of adverse selection in public annuities, but further distorts the private annuity market. These two plans have systematically different effects on retirees' utility levels: the good health group is adversely affected and the average health group benefits. On the other hand, the poor health group benefits from the VPAc plan but may be adversely affected under the MPAf plan. [ABSTRACT FROM AUTHOR]

We investigate whether individuals correctly assess the risk of default of annuity providers and incorporate this information into their decision‐making when purchasing an annuity. To do so, we analyze actual retirement product choices from a large administrative data set from Chile and exploit an exogenous change that decreased the coverage of government guarantees against annuity provider default. If individuals are rational and properly incorporate default risk into their decision process then, before this change, individuals should choose riskier providers that give higher annuity payments. However, we find that individuals' decisions are not influenced by changes in their protection against the risk of provider default. It seems that individuals have been unnecessarily reducing their annuity payments by not incorporating crucial information about their actual risk exposure to default when selecting annuities at retirement. [ABSTRACT FROM AUTHOR]

Social Security claiming can be one of the most challenging financial planning decisions that a client makes. To help financial advisors better counsel their clients, we address three lessons a client should consider (choosing the Social Security annuity, separating the claiming date from the retirement date, selecting the best "free money" to pass up). Five claiming strategies that may meet a client's needs are also suggested. [ABSTRACT FROM AUTHOR]