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The move towards riskier pensions: The importance of mortality

Anne G. Balter (), Malene Kallestrup-Lamb () and Jesper Rangvid ()
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Anne G. Balter: Tilburg University and Netspar, Postal: Tilburg University, Warandelaan 2, 5037AB Tilburg, The Netherlands
Malene Kallestrup-Lamb: Aarhus University, PeRCent and CREATES, Postal: Department of Economics and Business Economics, Aarhus University, Fuglesangs Allé 4, Building 2631, 141a, 8210 Aarhus V, DK
Jesper Rangvid: Copenhagen Business School and PeRCent, Postal: Department of Finance, Copenhagen Business School, Campus Solbjerg Plads 3, Building A, 4th and 5th floor, 2000 Frederiksbjerg, DK

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

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.

Keywords: Macro longevity risk; Variable annuities; Guarantee; Unguarantee (search for similar items in EconPapers)
JEL-codes: J32 J11 J17 G22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age, nep-fle and nep-rmg
Date: 2019-11-27
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