Designing the Payoff Phase in the Framework of Open Pension Schemes

Fully funded part of the Polish system exists already since 1999 pension reform, but payoff modes are still under debate. Our project assumes that benefits are paid by life annuity funds, possibly managed by existing Pension Societies. So far the Pension Societies are dedicated exclusively to service the accumulation phase of the Polish pension system by managing Open Pension Funds. Our project assumes that both investment risk and longevity risk are shared between Pension Society and annuitants. The initial level of payoffs are set conservatively, and their annual indexation depends on investment returns and longevity improvements. However, risk is substantially reduced through a buffering fund that absorbs a substantial part of volatility of investment returns and observed deviations of realized mortality from projected mortality. The mechanism of the buffering fund is an important element of the project and is presented in detail. Another novel solution is a mechanism of clearing of mortality effects between annuity providers. The clearing mechanism removes interest of annuity providers in attracting clients with shorter life expectation, and thus is a radical remedy against adverse selection. This is also presented in detail.