Non-Financial Defined Contribution Pension Schemes: Is a Survivor Dividend Necessary to Make the System Balanced?

Abstract

The survivor dividend, at a specific age, is the portion of participants' credited account balances that is distributed on a birth cohort basis from the account balances of participants who do not survive to retirement. This paper develops a model to show whether it would be justified to include the survivor dividend in the calculation of affiliate pension balances. The main findings are that the survivor dividend has a strong financial basis which enables the macro contribution rate applied to be the same as the individual credited rate, and that including the survivor dividend in the calculation of the initial pension is not irrelevant because the initial pension could rise by up to 21.84% depending on the mortality scenario used.

Keywords: Financial Equilibrium, Longevity Risk, Pay-As-You-Go, Public Pensions, Retirement, Transparency

JEL Classification: H55, J26