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Pensionmetrics 2: stochastic pension plan design during the distribution phase

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  • Blake, David
  • Cairns, Andrew J. G.
  • Dowd, Kevin

Abstract

We consider the choices available to a defined contribution (DC) pension plan member at the time of retirement for conversion of his pension fund into a stream of retirement income. In particular, we compare the purchase at retirement age of a conventional life annuity (i.e., a bond-based investment) with distribution programmes involving differing exposures to equities during retirement. The residual fund at the time of the plan member's death can either be bequested to his estate or revert to the life office in exchange for the payment of survival credits while alive. The most important decision, in terms of cost to the plan member, is the level of equity investment. We also find that the optimal age to annuitise depends on the bequest utility and the investment performance of the fund during retirement.
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Suggested Citation

  • Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2003. "Pensionmetrics 2: stochastic pension plan design during the distribution phase," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 29-47, August.
  • Handle: RePEc:eee:insuma:v:33:y:2003:i:1:p:29-47
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    References listed on IDEAS

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    1. David Blake, 1999. "Annuity Markets: Problems and Solutions," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 24(3), pages 358-375, July.
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    4. Blake, David, 1996. "Efficiency, Risk Aversion and Portfolio Insurance: An Analysis of Financial Asset Portfolios Held by Investors in the United Kingdom," Economic Journal, Royal Economic Society, vol. 106(438), pages 1175-1192, September.
    5. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December.
    6. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
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    8. Albrecht, Peter & Maurer, Raimond, 2001. "Self-Annuitization, Ruin Risk in Retirement and Asset Allocation: The Annuity Benchmark," Sonderforschungsbereich 504 Publications 01-35, Sonderforschungsbereich 504, Universit├Ąt Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    9. Jeffrey R. Brown & Mark J. Warshawsky, 2001. "Longevity-Insured Retirement Distributions from Pension Plans: Market and Regulatory Issues," NBER Working Papers 8064, National Bureau of Economic Research, Inc.
    10. Benjamin M. Friedman & Mark J. Warshawsky, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 135-154.
    11. Ranguelova, Elena & Feldstein, Martin, 2001. "Individual Risk in an Investment-Based Social Security System," Scholarly Articles 2797440, Harvard University Department of Economics.
    12. Benjamin M. Friedman & Mark Warshawsky, 1985. "The Cost of Annuities: Implications for Saving Behavior and Bequests," NBER Working Papers 1682, National Bureau of Economic Research, Inc.
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    14. Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
    15. Blake, David & Cairns, Andrew J. G. & Dowd, Kevin, 2001. "Pensionmetrics: stochastic pension plan design and value-at-risk during the accumulation phase," Insurance: Mathematics and Economics, Elsevier, vol. 29(2), pages 187-215, October.
    16. Martin Feldstein & Elena Ranguelova, 2001. "Individual Risk in an Investment-Based Social Security System," American Economic Review, American Economic Association, vol. 91(4), pages 1116-1125, September.
    17. Milevsky, Moshe A. & David Promislow, S., 2001. "Mortality derivatives and the option to annuitise," Insurance: Mathematics and Economics, Elsevier, vol. 29(3), pages 299-318, December.
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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • J1 - Labor and Demographic Economics - - Demographic Economics

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