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Bringing cost transparency to the life annuity market
Institution:1. Department of Actuarial Mathematics and Statistics, Heriot-Watt University, Edinburgh EH14 4AS, United Kingdom;2. Department of Econometrics, Riskcenter-IREA, University of Barcelona, Avinguda Diagonal 690, 08034 Barcelona, Spain;3. Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, United Kingdom;1. Department of Statistics, University of British Columbia, 3182 Earth Sciences Building, 2207 Main Mall Vancouver, BC, V6T 1Z4, Canada;2. Department of Statistics & Actuarial Science, Simon Fraser University, 8888 University Drive Burnaby, BC, V5A 1S6, Canada;1. Department of Mathematics and Statistics, York University, Toronto, Canada;2. Schulich School of Business, Finance Area, York University, Toronto, Canada;1. Cheriton School of Computer Science, University of Waterloo, Waterloo, ON, Canada N2L 3G1;2. School of Accounting and Finance, University of Waterloo, Waterloo, ON, Canada N2L 3G1;1. ESC Rennes Business School and CREST, France;2. Department of Mathematics, Université Libre de Bruxelles, Belgium;1. Towers Watson Research and Innovation Center, Youkeyuan Road 88, 430074, Wuhan, China;2. SAV, Swiss certified pension actuary, Switzerland;3. Towers Watson AG, Talstrasse 62, 8021 Zurich, Switzerland
Abstract:The financial industry has recently seen a push away from structured products and towards transparency. The trend is to decompose products, such that customers understand each component as well as its price. Yet the enormous annuity market combining investment and longevity has been almost untouched by this development.We suggest a simple decomposed annuity structure that enables cost transparency and could be linked to any investment fund. It has several attractive features: (i) it works for any heterogeneous group; (ii) participants can leave before death without financial penalty; and (iii) participants have complete freedom over their own investment strategy.
Keywords:Investment  Pensions  Pooled annuity fund  Lifetime savings  Mutual risk-sharing
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