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The move towards riskier pensions: The importance of mortality

Author

Listed:
  • Anne G. Balter

    (Tilburg University and Netspar)

  • Malene Kallestrup-Lamb

    (Aarhus University, PeRCent and CREATES)

  • Jesper Rangvid

    (Copenhagen Business School and PeRCent)

Abstract

This paper models the impact of unanticipated changes in forecasted life expectancies on guaranteed and unguaranteed pension products. We study a unique data set containing individuals offered the opportunity to substitute a guaranteed pension product with relatively low levels of risk to an unguaranteed product with a higher degree of financial and longevity risk. The complexity of the products and the increase in the level of financial literacy required by the individual to make such a decision motivate the need to properly model the most important drivers that characterize the differences between guaranteed and unguaranteed pension products. This is done within the standard Merton, Black and Scholes framework and we find a clear tradeoff between financial risk and longevity risk in terms of their effect on future pension payments. We find that unguaranteed pension products allow for more financial risk-taking and thus higher expected returns. However, unexpected longevity shocks can reduce pension payments in unguaranteed pension products to a lower level relative to guaranteed products.

Suggested Citation

  • Anne G. Balter & Malene Kallestrup-Lamb & Jesper Rangvid, 2019. "The move towards riskier pensions: The importance of mortality," CREATES Research Papers 2019-22, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2019-22
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    File URL: https://repec.econ.au.dk/repec/creates/rp/19/rp19_22.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Morten Ørregaard Nielsen & Antoine L. Noël, 2020. "To infinity and beyond: Efficient computation of ARCH(1) models," CREATES Research Papers 2020-13, Department of Economics and Business Economics, Aarhus University.
    2. Anine E. Bolko & Kim Christensen & Mikko S. Pakkanen & Bezirgen Veliyev, 2020. "Roughness in spot variance? A GMM approach for estimation of fractional log-normal stochastic volatility models using realized measures," CREATES Research Papers 2020-12, Department of Economics and Business Economics, Aarhus University.

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    More about this item

    Keywords

    Macro longevity risk; Variable annuities; Guarantee; Unguarantee;
    All these keywords.

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J17 - Labor and Demographic Economics - - Demographic Economics - - - Value of Life; Foregone Income
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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