Hostname: page-component-cd9895bd7-gvvz8 Total loading time: 0 Render date: 2024-12-24T00:54:29.705Z Has data issue: false hasContentIssue false

ACTUARIAL FAIRNESS AND SOLIDARITY IN POOLED ANNUITY FUNDS

Published online by Cambridge University Press:  25 July 2014

Catherine Donnelly*
Affiliation:
Department of Actuarial Mathematics and Statistics, and the Maxwell Institute for Mathematical Sciences, Heriot-Watt University, Edinburgh EH14 4AS, UK Phone: +44 131 451 3251, Fax: +44 131 451 3249 E-Mail: [email protected]

Abstract

Various types of structures that enable a group of individuals to pool their mortality risk have been proposed in the literature. Collectively, the structures are called pooled annuity funds. Since the pooled annuity funds propose different methods of pooling mortality risk, we investigate the connections between them and find that they are genuinely different for a finite heterogeneous membership profile. We discuss the importance of actuarial fairness, defined as the expected benefits equalling the contributions for each member, in the context of pooling mortality risk and comment on whether actuarial unfairness can be seen as solidarity between members. We show that, with a finite number of members in the fund, the group self-annuitization scheme is not actuarially fair: some members subsidize the other members. The implication is that the members who are subsidizing the others may obtain a higher expected benefit by joining a fund with a more favorable membership profile. However, we find that the subsidies are financially significant only for very small or highly heterogeneous membership profiles.

Type
Research Article
Copyright
Copyright © ASTIN Bulletin 2014 

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

Donnelly, C. (2014) Quantifying mortality risk in small defined-benefit pension schemes. Scandinavian Actuarial Journal, 2014 (1), 4157.Google Scholar
Donnelly, C., Guillén, M. and Nielsen, J.P. (2013) Exchanging uncertain mortality for a cost. Insurance: Mathematics and Economics, 52 (1), 6576.Google Scholar
Donnelly, C., Guillén, M. and Nielsen, J.P. (2014) Bringing cost transparency to the life annuity market. Insurance: Mathematics and Economics, 56, 1427.Google Scholar
Hanewald, K., Piggott, J. and Sherris, M. (2013) Individual post-retirement longevity risk management under systematic mortality risk. Insurance: Mathematics and Economics, 52 (1), 8797.Google Scholar
Piggott, J., Valdez, E.A. and Detzel, B. (2005) The simple analytics of a pooled annuity fund. Journal of Risk and Insurance, 72 (3), 497520.CrossRefGoogle Scholar
Pension Protection Fund and The Pensions Regulator (2013) The Purple Book: DB Pensions Universe Risk Profile, 2013. Available at http://www.pensionprotectionfund.org.uk/Pages/ThePurpleBook.aspx.Google Scholar
Qiao, C. and Sherris, M. (2013) Managing systematic mortality risk with group self pooling and annuitization schemes. Journal of Risk and Insurance, 80 (4), 949974.CrossRefGoogle Scholar
Sabin, M.J. (2010) Fair tontine annuity. Social Science Research Network. Available at http://ssrn.com/abstract=1579932.Google Scholar
Stamos, M.Z. (2008) Optimal consumption and portfolio choice for pooled annuity funds. Insurance: Mathematics and Economics, 43 (1), 5668.Google Scholar