When Can Insurers Offer Products that Dominate Delayed Old-Age Pension Benefit Claiming?

Abstract:     
It is common practice for pension schemes to offer their participants the option to delay benefit claiming until after the normal retirement age and adjust the annual benefit level as a result. This adjustment is often not actuarially neutral with respect to the age at which benefits are claimed. The degree of actuarial nonequivalence varies by interest rate as well as individual characteristics such as gender and social status. In this paper, we show that actuarial nonequivalence can imply that deferring benefit claiming is suboptimal, irrespective of the preferences of the individual. Specifically, we derive preference-free conditions under which delaying benefit claiming is dominated by claiming benefits early, and using them to buy super replicating annuity products from an insurance company. Annuity products will be designed with favorable terms for insurers which individuals prefer above deferred benefit claiming. The degree of actuarial nonequivalence in many pension schemes is such that dominating strategies exist even when the purchase of annuities would be significantly more costly than what is currently observed. Our results therefore suggest that both individuals and issuers of annuities can benefit from the actuarial nonequivalence inherent in many public pension schemes and pension funds. Even under unconditional actuarial equivalence, dominating strategies may well be available at the individual level if the claim adjustment is not interest rate dependent or if the pricing of annuities can be conditional on characteristics like gender and education level of the individual.

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