Risk and Uncertainty for Flexible Retirement Schemes

Nowadays, we are witnessing a wide and spread need to create flexible retirement schemes for facing global ageing and the prolonging working lives. Many countries have set up Social Security Systems, which link retirement age and/or pension benefits to life expectancy. In this context, we consider an indexing mechanism based on the expected residual life expectancy to adjust the retirement age and keep a constant Expected Pension Period Duration (EPPD). The analysis assesses the impact of different stochastic mortality models on the indexation by forecasting mortality paths based on extrapolative methods. Nevertheless, so far, in recent literature less attention has been given to the uncertainty issue related to model selection, although having appropriate estimates for the risk in mortality projections. With respect to the state of art, our proposal considers model-assembling techniques in order to balance fitting performances and uncertainty related to model selection, as well as uncertainty of parameters estimation. The indexation mechanism obtained by joining the retirement age up with the expected life span is tested in actuarial terms by assessing the implied reduction of costs also when assuming worst and best scenarios. The analysis concerns the Italian population and outlines gender differences.