Transforming Private Pensions: An Actuarial Model to Face Long-Term Costs

J. Iñaki De La Peña, M. Cristina Fernández-Ramos, Asier Garayeta and Iratxe D. Martín
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J. Iñaki De La Peña: Financial Economics I Department, Faculty of Business and Economics, University of the Basque Country, 48015 Bilbao, Spain
M. Cristina Fernández-Ramos: Department of Education, Junta Castilla-León, 47011 Valladolid, Spain
Asier Garayeta: Financial Economics I Department, Faculty of Business and Economics, University of the Basque Country, 48015 Bilbao, Spain
Iratxe D. Martín: Financial Economics I Department, Faculty of Business and Economics, University of the Basque Country, 48015 Bilbao, Spain

Mathematics, 2022, vol. 10, issue 7, 1-17

Abstract: A common response in public pension systems to population ageing is to link pensions to observed longevity. This creates an automatic stabiliser that arises from the valuation of a private actuarially funded system. However, no private pension plan mechanism has been articulated to adapt to this ageing in relation to the increased costs it entails. Private pension plans focus on saving for retirement; capital is accumulated to pay for it. However, perceptions of health status change over time and, as retirement age approaches, concerns about long-term care (LTC) increase. Moreover, there is not enough time to plan for it sufficiently in advance. This paper proposes to incorporate a mechanism to add an allowance to the financial pension (retirement, disability, rotation) to cover LTC within a private defined benefit pension plan, in the case of a pensioner becoming dependent. Depending on a pensioner’s health status, both the expected number of payments and their intensity are transformed. For this purpose, a mechanism is defined (through Markov chains) to adapt the amount of LTC support to a beneficiary’s health-related life expectancy. The study’s main contribution is that it establishes a private pension plan model that offers to incorporate dependency aid through this mechanism into the economic pensions without increasing the total cost of the plan. It adapts to life expectancy according to a person’s state (healthy, disabled, dependent).

Keywords: ageing; dependency; long-term care; private pensions (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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