The Distribution of Future Annuity Prices under Interest-Rate and Longevity Risks
Pension Institute Discussion Paper No. PI-0823
25 Pages Posted: 10 Feb 2009
Date Written: August 24, 2008
This paper examines the impact of interest-rate risk and longevity risk on the distribution of annuity prices in the distant future. To so, the paper uses a computationally efficient algorithm that simulates the state variables out to the end of the horizon period and then uses a Taylor series approximation to compute approximate annuity prices at the end of that period. Illustrative results suggest that annuity prices are likely to rise considerably, but are also quite uncertain. These findings have some unpleasant implications for future pensioners and those who will have to look after them.
Keywords: longevity risk, interest-rate risk, annuity prices, Taylor series
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