The move towards riskier pensions: The importance of mortality
Anne G. Balter (),
Malene Kallestrup-Lamb () and
Jesper Rangvid ()
Additional contact information
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
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
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2019-22
Access Statistics for this paper
More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().