Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-16T17:10:00.214Z Has data issue: false hasContentIssue false
  • English
  • Français

A comparison of three different pension savings products with special emphasis on the payout phase

Published online by Cambridge University Press:  06 December 2011

Peter Løchte Jørgensen  and
Per Linnemann
Get access Rights & Permissions [Opens in a new window]

Abstract

The purpose of this article is to illustrate how the pension benefits a pension saver will (expect to) receive will depend on the type of pension scheme chosen. We compare three widely different pension savings products: the “traditional” with-profits scheme involving bonus entitlement (average interest rate product), a market-based Unit Link scheme and, finally, a formula based smoothed investment-linked annuity scheme – TimePension in short – which is on many points a cross between the two prior-mentioned types of savings products.

The three product types mentioned above have been analysed in previous literature, but those comparisons were based almost entirely on the values of pension savings accounts at the expiry of the accumulation period. This article will include the payout phase (decumulation phase) in the analysis, enabling us to analyse the size of paid-out pension benefits themselves as well as the possibilities of adjusting these benefits periodically. Compared to earlier articles, we have also improved the underlying model for the uncertainty of the underlying financial market.

The article demonstrates that expected pension benefits from the three schemes are an increasing function of the allocation to shares in the underlying investment portfolios. TimePension involves the highest allocation to shares and therefore offers, on average, the highest pension benefits, followed by the Unit Link scheme. In the third and last place comes the traditional with-profits scheme, which has a relatively low allocation to shares, but which, in return, also provides relatively safe and stable pension benefits. We also show, however, that the stability of pension benefits from a TimePension scheme is completely level with the stability of benefits from the traditional scheme. Unit Link-based pension benefits, on the other hand, vary far more, and pension savers in this product segment will experience much higher annual adjustments – in a both negative and positive direction – than savers in the other product segments.

Keywords

Comparison of retirement productsStochastic financial analysisTraditional with-profitsUnit-linkedFormula based smoothed investment- linkedPayout phaseStabilisation of retirement income payments.
Type
Papers
Information
Annals of Actuarial Science , Volume 6 , Issue 1 , 16 January 2012 , pp. 137 - 152
Copyright
Copyright © Institute and Faculty of Actuaries 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Danish Society of Actuaries (2008). Det Fordelingsmæssige Kontributionsprincip: Om fordeling og omfordeling (The Principle of Allocated Profit Sharing: On Distribution and Redistribution), October 2008. In Danish. The report is available at www.aktuarforeningen.dk.Google Scholar
Danish Financial Supervisory Authority (1998). Rapport om betaling for rentegaranti (Report on payment for interest rate guarantees). In Danish. The report is available at www.ftnet.dk/sw2676.asp.Google Scholar
Danish Financial Supervisory Authority (2006). Bekendtgørelse om kontributionsprincippet (Executive Order on the Principle of Profit Sharing), Executive Order No. 1066 of 27 October 2006. In Danish. The Order is available at www.ftnet.dk.Google Scholar
Danish Insurance Association (2008). Samfundsforudsætninger for pensionsfremskrivninger 2009 (Common assumptions for pension projections 2009). In Danish. Available from e.g. www.forsikringogpension.dk.Google Scholar
Grosen, A., Jørgensen, P.L. (2000). Fair Valuation of Life Insurance Liabilities: The Impact of Interest Rate Guarantees, Surrender Options, and Bonus Policies. Insurance: Mathematics and Economics, 26(2), 37–57.Google Scholar
Guillén, M., Jørgensen, P.L., Nielsen, J.P. (2006). Return Smoothing Mechanisms in Life and Pension Insurance: Path-dependent Contingent Claims. Insurance: Mathematics and Economics, 38(2), 229–252.Google Scholar
Jakobsen, S. (2003). Tidspension som investeringsstrategi (TimePension as an Investment Strategy). Finans/Invest, 3, 11–17. In Danish.Google Scholar
Jørgensen, P.L. (2004). On Accounting Standards and Fair Valuation of Life Insurance and Pension Liabilities. Scandinavian Actuarial Journal, 104(5), 372–394.Google Scholar
Jørgensen, P.L. (2007). Lognormal Approximation of Path-dependent Pension Scheme Payoffs. European Journal of Finance, 13(7), 595–619.CrossRefGoogle Scholar
Munk, C., Sørensen, C., Vinther, T.N. (2004). Dynamic Asset Allocation under Mean-reverting Returns, Stochastic Interest Rates, and Inflation Uncertainty: Are Popular Recommendations Consistent with Rational Behavior? International Review of Economics and Finance, 13, 141–166.Google Scholar
Nielsen, J.P., Jørgensen, P.L. (2002). Tidspension (TimePension). Finans/Invest, 6, 16–22. In Danish.Google Scholar
Vasicek, O. (1977). An Equilibrium Characterization of the Term Structure. Journal of Financial Economics, 5, 177–188.Google Scholar
Wachter, J.A. (2002). Portfolio and Consumption Decisions under Mean-reverting Returns: An Exact Solution for Complete Markets. Journal of Financial and Quantitative Analysis, 37(1), 63–92.Google Scholar