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

Posted: 4 Nov 2009

See all articles by Lisanne Sanders

Lisanne Sanders

Tilburg University - CentER for Economic Research; Netspar

Anja De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER

Theo Nijman

Tilburg University - Tilburg University School of Economics and Management

Date Written: November 3, 2009

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.

Suggested Citation

Sanders, Lisanne and De Waegenaere, Anja M.B. and Nijman, Theo E., When Can Insurers Offer Products that Dominate Delayed Old-Age Pension Benefit Claiming? (November 3, 2009). Available at SSRN: https://ssrn.com/abstract=1499163

Lisanne Sanders (Contact Author)

Tilburg University - CentER for Economic Research ( email )

Tilburg, 5000 LE
Netherlands

Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Anja M.B. De Waegenaere

Tilburg University - Department of Econometrics & OR, Netspar, and CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Theo E. Nijman

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)

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