Using an optimising financial planning model in the tradition of Merton (1969, 1971), and Richard (1975 we explore how individuals should determine their life insurance and annuity choices, given uncertainty about investment returns and mortality. Both consumption and bequests appear as arguments in the individual's preference function. The model explicitly recognises the existence of social security in retirement, and of loadings on insurance premiums, due to administration costs in the life insurance and annuities markets. The model sheds light on the reasons for the thinness of voluntary life annuity markets worldwide. The relative importance of pre-existing annuitisation through social security, the role of bequests, and premium loadings are quantitatively assessed within a single optimising framework. Results are presented for a model specification calibrated to Japan.

No abstract

No abstract

Coherent models were developed recently to forecast the mortality of two or more sub-populations simultaneously and to ensure long-term non-divergent mortality forecasts of sub-populations. This paper evaluates the forecast accuracy of two recently-published coherent mortality models, the Poisson common factor and the product-ratio functional models. These models are compared to each other and the corresponding independent models, as well as the original Lee-Carter model. All models are applied to age-gender-specific mortality data for Australia and Malaysia and age-gender-ethnicity-specific data for Malaysia. The out-of-sample forecast error of log death rates, male-to-female death rate ratios and life expectancy at birth from each model are compared and examined across groups. The results show that, in terms of overall accuracy, the forecasts of both coherent models are consistently more accurate than those of the independent models for Australia and for Malaysia, but the relative performance differs by forecast horizon. Although the product-ratio functional model outperforms the Poisson common factor model for Australia, the Poisson common factor is more accurate for Malaysia. For the ethnic groups application, ethnic-coherence gives better results than gender-coherence. The results provide evidence that coherent models are preferable to independent models for forecasting sub-populations' mortality.

We develop a generalisation of the World Bank (1994) model of forced saving for retirement. This broader model consists of two tiers of second pillar savings – mandated and non-mandated (voluntary). Furthermore, the government can set two types of guarantees on the first (mandated) tier – investment returns and annuity prices – leading to possible cross-subsidisation between the tiers. This has the potential to induce social redistribution, foster a liquid private market for life annuities, and obviate some of the investment risk and annuity price risk that retirees face.We formulate a quantitative model of financial flows within such a system, which explains the mechanism by which cross-subsidisation occurs. Based on this analysis, a taxonomy of two-tiered retirement systems is presented, that is based on the choices that the government makes.