Annuitisation and cross-subsidies in a two-tiered retirement saving system

Abstract

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.

Optimal annuitisation, housing and reverse mortgage in retirement in the presence of a means-tested public pension

“…Very few Australians annuitise any wealth [29,32], which is consistent with retirees globally who receive other stable income streams [23,28,32]. The exception is Switzerland, where the majority of retirees do annuitise [9,10]. Results of our modelling confirm that meanstested pension crowds out voluntary annuitisation in retirement, and that annuitisation is optimal sooner rather than later once retired.…”

“…Then, the market price of risk λ can be estimated by minimising the sum of squared difference between the observed term structure of the zero coupon market rates 10 and model predicted zero rates (27) over the trading dates t i , i = 1, . .…”

“…Taken from https://www.quandl.com/data/RBA/F13-International-Official-Interest-Rates and https:// tradingeconomics.com/australia/inflation-cpi10 Taken from https://www.quandl.com/data/RBA/F17_0-Zero-Coupon-Interest-Rates-Analytical-Series-Yields…”

The Impact of Pension Funding Mechanisms on the Stability and Payoff from Swiss DC Pension Schemes: A Sensitivity Analysis

“…While in our model B t increases with a rate of r PL , this is not required in practice, as bonuses do not fall under the legal minimum (see, e.g., Avanzi and Purcal (2014)). In the above, we assume that surpluses are paid out as a lump sum.…”

“…This pressure comes along with operational risks with regard to compliance, higher transparency and governance requirements. Furthermore, one has to consider increasing wealth transfers between younger and older contributor groups (Avanzi and Purcal, 2014;Eling, 2012) or potentially unfair mechanisms regarding employees who change their employer and pension fund. 2 These changes pose challenges to the Swiss system and the ones in other countries.…”