The Valuation and Assessment of Retirement Income Products: a Unified Markov Chain Monte Carlo Framework

Abstract

This paper devises a flexible assessment framework of a catalogue of existing retirement income products which include, account-based pensions, group self-annuities and variable annuity contracts. It utilises the Hamiltonian Monte Carlo approach, a proven computational technique for simulating conditional distributions in higher dimensions. Graphical illustrations for the risk-return trade-offs for each product are presented which can readily be adapted by advisors, and all stakeholders as a tool for enhancing the decision-making process for retirees. The key features of the retirement income products which include variable annuities, account-based pension, and group self-annuities, are presented in an easily understandable way for a retiree with common knowledge. Sensitivity analysis on the investment options of the underlying fund provides insights for retirees to maximise income according to their risk preferences. We also devise a lifetime utility analysis framework for the comparison of lifetime utility from purchasing the products.

Keywords: Retirement income products; Hamiltonian Monte Carlo (HMC); Account-based pension; Variable annuities (VAs); Group self-annuities (GSAs).

JEL Classification: G22; C15.