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Self-selection and risk sharing in a modern world of life-long annuities

  • R. Gerrard (a1), M. Hiabu (a1), I. Kyriakou (a1) and J. P. Nielsen (a1)
Abstract

Communicating a pension product well is as important as optimising the financial value. In a recent study, we showed that up to 80% of the value of a pension lump sum could be lost if customer communication failed. In this paper, we extend the simple customer interaction of the earlier contribution to the more challenging lifetime annuity case. Using a simple mobile phone device, the pension customer can select the life-long optimal investment strategy within minutes. The financial risk trade-off is presented as a trade-off between the pension paid and the number of years the life-long annuity is guaranteed. The pension payment decreases when investment security increases. The necessary underlying mathematical financial hedging theory is included in the study.

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Copyright
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted re-use, distribution, and reproduction in any medium, provided the original work is properly cited.
Corresponding author
*Correspondence to: Jens P. Nielsen, Faculty of Actuarial Science and Insurance, Cass Business School, City, University of London, London EC1Y 8TZ, UK. E-mail: jens.nielsen.1@city.ac.uk
References
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Bräutigam, M., Guillén, M. & Nielsen, J.P. (2017). Facing up to longevity with old actuarial methods: a comparison of pooled funds and income tontines. The Geneva Papers on Risk and Insurance-Issues and Practice, 42, 406422.
Dimson, E., Marsh, P. & Staunton, M. (2002). Triumph of the Optimists: 101 Years of Global Investment Returns. Princeton, NJ: Princeton University Press.
Donnelly, C., Guillén, M. & Nielsen, J.P. (2013). Exchanging uncertain mortality for a cost. Insurance: Mathematics and Economics, 52, 6576.
Donnelly, C., Guillén, M. & Nielsen, J.P. (2014). Bringing cost transparency to the life annuity market. Insurance: Mathematics and Economics, 56, 1427.
Donnelly, C., Guillen, M., Nielsen, J.P. & Pérez-Marn, A.M. (2018). Implementing individual savings decisions for retirement with bounds on wealth. ASTIN Bulletin, 48, 111137.
Gerrard, R., Hiabu, M., Kyriakou, I. & Nielsen, J.P. (2017). ARC webinar: Minimising Longevity and Investment Risk while optimising Future Pension Plans, available at https://www.youtube.com/watch?v=BPBjjG_wrMo&list=PLTH4sS-tsiG8f13gGxrlO22NroLo44TdE&index=3 (accessed 6 November 2018).
Gerrard, R., Hiabu, M., Kyriakou, I. & Nielsen, J.P. (2018). Communication and Personal Selection of Pension Saver’s Financial Risk. To appear in European Journal of Operational Research.
Guillén, M., L., J.P. & Nielsen, J.P. (2006). Return smoothing mechanisms in life and pension insurance. Insurance: Mathematics and Economics, 38, 229252.
Merton, R.C. (2014). The crisis in retirement planning. Harvard Business Review, 92, 4350.
Office for National Statistics (2017). National life tables: England, available at https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/datasets/nationallifetablesenglandreferencetables (accessed 13 February 2018).
Stamos, M.Z. (2008). Optimal consumption and portfolio choice for pooled annuity funds. Insurance: Mathematics and Economics, 43, 5668.
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British Actuarial Journal
  • ISSN: 1357-3217
  • EISSN: 2044-0456
  • URL: /core/journals/british-actuarial-journal
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