Longevity risk in pension annuities with exchange options: The effect of product design
We consider defined benefit pension plans that, at retirement age, allow the participant to choose between a single life annuity and a joint and survivor annuity. We compare two plans that differ in terms of how pension rights are accrued. In one plan, the participant accrues the right to receive a single life annuity, and can exchange that annuity for an actuarially equivalent joint and survivor annuity at retirement date. The opposite holds in the other plan. We show that both plans are affected by longevity risk in two ways. First, the participants' choices at retirement age affect the ratio of survivor benefits over single life benefits, and, therefore, affect the natural hedge potential that arises from combining single life and survivor annuities. Second, uncertainty in the rate at which the participant will be allowed to exchange one type of annuity for the other at retirement date induces uncertainty in the level of the nominal rights for single life and survivor annuities, respectively. We compare the two plans, and show that longevity risk is substantially lower in case rights are accrued in the form of a joint and survivor annuity.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Salm, Martin, 2006.
"Can Subjective Mortality Expectations and Stated Preferences Explain Varying Consumption and Saving Behaviors among the Elderly?,"
IZA Discussion Papers
2467, Institute for the Study of Labor (IZA).
- Martin Salm, 2006. "Can subjective mortality expectations and stated preferences explain varying consumption and saving behaviors among the elderly?," MEA discussion paper series 06111, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
- David Blake & Andrew Cairns & Kevin Dowd & Richard MacMinn, 2006. "Longevity Bonds: Financial Engineering, Valuation, and Hedging," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(4), pages 647-672.
- Jeffrey R. Brown & James M. Poterba, 1999. "Joint Life Annuities and Annuity Demand by Married Couples," NBER Working Papers 7199, National Bureau of Economic Research, Inc.
- Brouhns, Natacha & Denuit, Michel & Vermunt, Jeroen K., 2002. "A Poisson log-bilinear regression approach to the construction of projected lifetables," Insurance: Mathematics and Economics, Elsevier, vol. 31(3), pages 373-393, December.
- Daniel S. Hamermesh, 1982. "Expectations, Life Expectancy, and Economic Behavior," NBER Working Papers 0835, National Bureau of Economic Research, Inc.
- Gan, Li & Gong, Guan & Hurd, Michael & McFadden, Daniel, 2015.
"Subjective mortality risk and bequests,"
Journal of Econometrics,
Elsevier, vol. 188(2), pages 514-525.
- Daniel S. Hamermesh, 1985. "Expectations, Life Expectancy, and Economic Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 389-408.
- Olivieri, Annamaria, 2001. "Uncertainty in mortality projections: an actuarial perspective," Insurance: Mathematics and Economics, Elsevier, vol. 29(2), pages 231-245, October.
- Li Gan & Michael Hurd & Daniel McFadden, 2003.
"Individual Subjective Survival Curves,"
NBER Working Papers
9480, National Bureau of Economic Research, Inc.
- Carter, Lawrence R. & Lee, Ronald D., 1992. "Modeling and forecasting US sex differentials in mortality," International Journal of Forecasting, Elsevier, vol. 8(3), pages 393-411, November.
- Olivieri, Annamaria & Pitacco, Ermanno, 2003. "Solvency requirements for pension annuities," Journal of Pension Economics and Finance, Cambridge University Press, vol. 2(02), pages 127-157, July.
- Hári, Norbert & De Waegenaere, Anja & Melenberg, Bertrand & Nijman, Theo E., 2008. "Longevity risk in portfolios of pension annuities," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 505-519, April.
- Koissi, Marie-Claire & Shapiro, Arnold F. & Hognas, Goran, 2006. "Evaluating and extending the Lee-Carter model for mortality forecasting: Bootstrap confidence interval," Insurance: Mathematics and Economics, Elsevier, vol. 38(1), pages 1-20, February.
When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:46:y:2010:i:1:p:222-234. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.