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Longevity risk in pension annuities with exchange options: The effect of product design


  • Stevens, Ralph
  • De Waegenaere, Anja
  • Melenberg, Bertrand


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.

Suggested Citation

  • Stevens, Ralph & De Waegenaere, Anja & Melenberg, Bertrand, 2010. "Longevity risk in pension annuities with exchange options: The effect of product design," Insurance: Mathematics and Economics, Elsevier, vol. 46(1), pages 222-234, February.
  • Handle: RePEc:eee:insuma:v:46:y:2010:i:1:p:222-234

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    References listed on IDEAS

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    Cited by:

    1. Anja De Waegenaere & Bertrand Melenberg & Ralph Stevens, 2010. "Longevity Risk," De Economist, Springer, vol. 158(2), pages 151-192, June.
    2. David Blake & Christophe Courbage & Richard MacMinn & Michael Sherris, 2011. "Longevity Risk and Capital Markets: The 2010–2011 Update," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 36(4), pages 489-500, October.
    3. Lin, Tzuling & Tsai, Cary Chi-Liang, 2013. "On the mortality/longevity risk hedging with mortality immunization," Insurance: Mathematics and Economics, Elsevier, vol. 53(3), pages 580-596.
    4. David Blake & Andrew Cairns & Guy Coughlan & Kevin Dowd & Richard MacMinn, 2013. "The New Life Market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(3), pages 501-558, September.
    5. Blake, David & Brockett, Patrick & Cox, Samuel & MacMinn, Richard, 2011. "Longevity risk and capital markets: The 2009-2010 update," MPRA Paper 28868, University Library of Munich, Germany.
    6. Lin, Tzuling & Tsai, Cary Chi-Liang, 2016. "Hedging mortality/longevity risks of insurance portfolios for life insurer/annuity provider and financial intermediary," Insurance: Mathematics and Economics, Elsevier, vol. 66(C), pages 44-58.
    7. repec:bla:jrinsu:v:84:y:2017:i:4:p:1203-1230 is not listed on IDEAS

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