A new approach for satisfactory pensions with no guarantees

Abstract

The increase in longevity, the ultra-low interest rates and the guarantees associated to pension benefits have put significant strain on the pension industry. Consequently, insurers need to be in a financially sound position while offering satisfactory benefits to participants. In this paper, we propose a pension design that goes beyond the idea of annuity pools and unit-linked insurance products. The purpose is to replace traditional guarantees with low volatility, mainly achieved by collective smoothing algorithms and an adequate asset management. With the aim of offering security to the insured, we discuss the optimisation of some key variables of the proposed pension product to target both a satisfactory level of the initial pension and stable pension payments over time. By combining such well-known products as unit-linked and annuities, we show that it is possible to design a pension product with both high-expected return and low risk for the policyholder. However, differently than in the classical unit-linked framework, we do not allow the individuals to choose the underlying funds. Instead, the funds are under the surveillance of an insurance company's professional risk management, which induces better informed decisions.

Optimal investment strategies for pension funds with regulation-conform dynamic pension payment management in the absence of guarantees

“…Possible future research studies on such pension products could generally elaborate on alternative buffer processes or consider a more advanced mortality model with a mortality rate that is exposed to (unexpected) shocks such as the paper by [8] which studies a mortality model with mortality improvement ratio in the framework of pricing variable annuities with guaranteed minimum repayments. Furthermore, future research could consider alternative models compared to our approach, for a discussion we refer to [6], and could therefore for instance deal with the design, the modeling and the optimal management of a pension fund plan that belongs to an entire collective of investors, where the wealth is managed identically for all clients instead of a cohort-specific treatment. 1.…”

“…An extensive numerical case study visualizes the optimal asset allocation strategy and highlights its benefits in Sect. 6. Finally, Sect.…”

“…infinite-horizon Markovian decision problems, also known as Markovian dynamic programming (MDP) problems. The transition function T B for S ↦ T B (S, a, Z) is given by where S = (V, P) and and 6 with…”

“…. 6 The definition corresponds to the transition for a single client. If one aims for determining the optimal investment decisions for a cohort of customers, then we define with (5.7)…”

“…We conclude that our proposed model leads to a sophisticated optimal dynamic asset allocation policy that provides remarkable benefits to clients and represents a meaningful alternative to riskaverse clients. For a proposal and some discussion of an alternative model formulation that designs a pension product without guarantees we refer to [6], where the modeling is related to but differs from our approach.…”