The 12th annual
conference organized by the IFID Centre will take place at the Fields
Institute on the morning of Thursday, November 28th. The theme of
this year’s conference will be ALTERNATIVE ANNUITY DESIGNS: How
should we engineer the next generation of retirement income products
so that they are appealing to retirees but also share risk equitably
with insurance companies?
Speakers:
Jorge Miguel Bravo (University of Évora & Nova University
of Lisbon)
Sharing longevity risk in life annuity contracts (slides)
Abstract: In this talk we develop a conceptual framework for
the payout phase in which annuity providers and policyholders
share longevity and investment risks in a flexible way. To be
more precise, we develop a participating life annuity product
in which systematic longevity risk, i.e., the risk associated
with systematic deviations from mortality rates extracted from
prospective life tables is shared between annuitants and annuity
providers. This will address some of the main demand and supply
constraints in annuity markets, namely the inexistence of appropriate
life tables, the perception of unfair pricing, the consideration
of bequest motives, adverse selection problems or the lack of
financial instruments to hedge against longevity risk. Contrary
to traditional Group self-annuitization (GSA) strategies, in which
surviving policyholders bear both systematic and unsystematic
longevity risk, we devise a contract in which, in exchange for
premium, annuitants will bear part of longevity risk.
Catherine Donnelly (Heriot-Watt University, Edinburgh, U.K.)
The future is not guaranteed: lesser-known relatives of the life annuity
(slides)
Abstract: Life annuities give a guaranteed income, and hence
financial security, for life. Yet many people do not buy them,
for reasons that may include their apparent high cost and irreversible
nature. This means that relatively few people gain from one of
the primary benefits of life annuities - the pooling of mortality
risk. Is there another solution?
We examine a family of alternatives to the life annuity, called
"pooled annuity funds". Surviving participants in the
pooled annuity funds have a higher income than they would have
managing their finances alone. The reason is due to the pooling
of mortality risk. Unlike a life annuity contract, pooled annuity
funds can allow participants to have complete investment freedom
and they do not have to be irreversible.
A pooled annuity fund offers no financial guarantees: this has
positive and negative implications for individuals. We discuss
the advantages and disadvantages of pooled annuity funds, and
analyze the number of people required to pool adequately the mortality
risk.
The presentation is based on joint work with Montserrat Guillen
of University of Barcelona, Spain, and Jens Perch Nielsen, Cass
Business School, London, U.K.
Don Ezra (Principal, Don Ezra Consulting Services)
The Ideal Retirement Annuity: A Personal Perspective
Michael J. Sabin (Independent Consultant, Sunnyvale, CA)
Fair Tontine Annuity (slides)
Abstract: A tontine is an arrangement in which a group of members
contribute money to a pool, and each time a member dies, his or
her contribution is divided among surviving members. Tontines
have existed since the 1600's but fell out of favor in modern
times as insurer-provided annuities became available.
In this talk we revisit the tontine and show how to make it actuarially
fair across a diverse group of members of varying ages and contribution
amounts. This is accomplished by distributing a dying member's
contribution in unequal amounts according to a plan that provides
each member with a fair bet. The fairness property turns out to
solve a handful of problems with the tontine, both theoretical
and practical. The resulting fair tontine is a versatile block
on which legitimate financial products can be built.
One such product is a fair tontine annuity (FTA), where the member
makes a one-time contribution and receives payments on a fixed
schedule (e.g., monthly) that last for his lifetime. Each payment
is a random amount whose expected value is constant over the member's
lifetime. The FTA offers a higher expected payout than an insurer-provided
annuity because no profit is being extracted. It imposes no risk
on the provider and thus can be offered by vendors other than
insurers, such as mutual fund houses, retail brokers, etc.
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