Facing Up to Longevity with Old Actuarial Methods: A Comparison of Pooled Funds and Income Tontines
- 77 Downloads
We compare the concepts underlying modern actuarial solutions to pension insurance and present two recently developed pension products—pooled annuity overlay funds (based on actuarial fairness) and equitable income tontines (based on equitability). These two products adopt specific approaches to the management of longevity risk by mutualising it among participants rather than transferring it completely to the insurer. As the market would appear to be ready for such innovations, our study seeks to establish a general framework for their introduction. We stress that the notion of actuarial fairness, which characterises pooled annuity overlay funds, enables participants to join and exit the fund at any time. Such freedom of action is a quite remarkable feature and one that cannot be matched by lifelong contracts.
Keywordspensions life table retirement income longevity risk actuarial fairness equitability
We thank the Spanish Ministry of Economy FEDEF grant ECO2016-76203-C2-2-P and ICREA Academia. Jens Perch Nielsen was funded by the research grant “Minimizing longevity and investment risk while optimizing future pension plans”, sponsored by the Institute and Faculty of Actuaries, UK.
- Donnelly, C., Guillén, M. and Nielsen, J.P. (2013) ‘Exchanging uncertain mortality for a cost’, Insurance: Mathematics and Economics 52(1): 65–76.Google Scholar
- Donnelly, C., Guillén, M. and Nielsen, J.P. (2014) ‘Bringing cost transparency to the life annuity market’, Insurance: Mathematics and Economics 56: 14–27.Google Scholar
- Forman, B.J. and Sabin, M.J. (2014) ‘Pension tontines’, University of Pennsylvania Law Review 163: 755–831.Google Scholar
- Gatzert, N. and Klotzki, U. (2016) ‘Enhanced annuities: Drivers of and barriers to supply and demand’, The Geneva Papers on Risk and Insurance—Issues and Practice 41(1): 53–77.Google Scholar
- Guo, J. (2015) ‘It’s sleazy, it’s totally illegal and yet it could become the future of retirement’, The Washington Post, 28 September.Google Scholar
- Huang, H. and Milevsky, M.A. (2016) Longevity risk and retirement income tax efficiency: A location spending rate puzzle. Insurance: Mathematics and Economics 71: 50–62.Google Scholar
- Huang, H., Milevsky, M.A. and Young, V.R. (2016) ‘Optimal purchasing of deferred income annuities when payout yields are mean-reverting’, Review of Finance 21(1): 1–35.Google Scholar
- Milevsky, M.A. and Salisbury, T.S. (2015) ‘Optimal retirement income tontines’, Insurance: Mathematics and Economics 64: 91–105.Google Scholar
- Spedicato, G.A. (2013) ‘The lifecontingencies package: Performing financial and actuarial mathematics calculations in R’. Journal of Statistical Software 55(10): 1–36. URL http://www.jstatsoft.org/v55/i10/.
- Stamos, M.Z. (2008) Optimal consumption and portfolio choice for pooled annuity funds. Insurance: Mathematics and Economics 43(1): 56–68.Google Scholar
- Valdez, E.A., Piggot, J. and Wang, L. (2006) Demand and adverse selection in a pooled annuity fund. Insurance: Mathematics and Economics 39(2): 251–266.Google Scholar
- Verde, T. (2017) ‘When others die, tontine investors win’, The New York Times, 24 March.Google Scholar
- Vertes, D. (2016) ‘Tontines: strange name, great idea for retirement (so good they’re illegal)’, The Huffington Post, 1 October.Google Scholar
- Weinert, J.H. and Gründl, H. (2016) The modern tontine: An innovative instrument for longevity risk management in an aging society, ICIR Working Paper Series No. 22/16.Google Scholar