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A special issue of Risks (ISSN 2227-9091).

Deadline for manuscript submissions: closed (30 April 2021) | Viewed by 43878

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Special Issue Editors

Prof. Dr. Jorge Miguel Bravo

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Guest Editor

1. NOVA IMS—Information Management School, New University of Lisbon, 1070-312 Lisbon, Portugal
2. Department of Economics, Université Paris-Dauphine PSL, 75775 Paris, France
Interests: longevity risk management; pensions; actuarial science; social policy; financial economics; labour economics; interest rate risk management; credit risk management; data science; population economics
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Prof. Dr. Mercedes Ayuso

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Guest Editor

Riskcenter, Universidad de Barcelona, Av. Diagonal, 690, 08034 Barcelona, Spain
Interests: pensions; longevity; ageing and insurance; actuarial science; risks and insurance; long-term care insurance; pricing, statistical methods for automobile fraud detection; quantitative methods for BI; traffic crashes; telematics
Special Issues, Collections and Topics in MDPI journals

Prof. Dr. Edward Palmer

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Guest Editor

Professor Emeritus, Department of Economics and Uppsala Center for Labor Studies, Uppsala University, SE-751 20 Uppsala, Sweden
Interests: social insurance; social policy; pensions; income distribution and welfare economics; macroeconomics; financial economics; labour economics; modelling and projecting mortality/life expectancy in the context of pensions
Special Issues, Collections and Topics in MDPI journals

Prof. Dr. Robert Holzmann

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Guest Editor

Austrian National Bank, and Austrian Academy of Sciences, and Australian Centre of Excellence in Population Ageing Research, CEPAR@UNSW, 1090 Vienna, Austria
Interests: pensions; social protection; labour economics and migration; taxation; financial literacy and education; macroeconomics; monetary policy
Special Issues, Collections and Topics in MDPI journals

Special Issue Information

Dear Colleagues,

The ability to identify, quantify, forecast and manage the economic, demographic and financial risks that challenge the long-term objectives of public and private retirement income schemes is of paramount importance for creating and managing financially sustainable and intra- and intergenerationally fair public and private pension schemes. This Special Issue of Risks is devoted to high-quality papers that move the state-of-the-art forward with innovative theoretical, practical and policy-oriented developments in risk management. We welcome papers related, but not limited to, the following topical issues:

Financial and non-financial DB and DC retirement scheme design and financial sustainability, risk pooling, intra- and intergenerational fairness
Approaches in predictive modelling of longevity
Policy and models for dealing with socio-economic differences in longevity
Understanding rate of return risks in an ageing and overcapitalized world and what it means for the design of pension schemes
Dealing with the longevity and rate of return risks in constructing the pension payout phase
Individual and societal risks of incentives in work and retirement decisions (timing, saving/dissaving, etc.)
Designing automatic balancing mechanisms for public retirement schemes
Risk-sharing between providers and participants in the context of uncertain return and longevity
Drawdown models for retirement savings
Behavioural issues and their effects on pension outcomes and policy
Issues, models and policy for within household risk-sharing arrangements for pensions
The political risks and challenges for the outcomes (equity, stability, efficiency, etc.) of pension schemes
Optimal asset/risk models for pension fund management
Indexation issues in accumulation and payout phases of pension schemes
Equity release mechanisms

Prof. Dr. Jorge Miguel Bravo
Prof. Dr. Mercedes Ayuso
Prof. Dr. Edward Palmer
Prof. Dr. Robert Holzmann
Guest Editors

Manuscript Submission Information

Manuscripts should be submitted online at www.mdpi.com by registering and logging in to this website. Once you are registered, click here to go to the submission form. Manuscripts can be submitted until the deadline. All submissions that pass pre-check are peer-reviewed. Accepted papers will be published continuously in the journal (as soon as accepted) and will be listed together on the special issue website. Research articles, review articles as well as short communications are invited. For planned papers, a title and short abstract (about 100 words) can be sent to the Editorial Office for announcement on this website.

Submitted manuscripts should not have been published previously, nor be under consideration for publication elsewhere (except conference proceedings papers). All manuscripts are thoroughly refereed through a single-blind peer-review process. A guide for authors and other relevant information for submission of manuscripts is available on the Instructions for Authors page. Risks is an international peer-reviewed open access monthly journal published by MDPI.

Please visit the Instructions for Authors page before submitting a manuscript. The Article Processing Charge (APC) for publication in this open access journal is 1800 CHF (Swiss Francs). Submitted papers should be well formatted and use good English. Authors may use MDPI's English editing service prior to publication or during author revisions.

Keywords

Pensions
Annuities
Pension scheme design
Retirement saving design
Life cycle saving
Life expectancy
Heterogeneity in life expectancy
Risk-management
Risk-sharing
Balancing mechanisms
Asset/risk fund management
Equity release mechanisms

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Published Papers (11 papers)

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Research

19 pages, 390 KiB

Open AccessArticle

Progressive Pension Formula and Life Expectancy Heterogeneity

by Keivan Diakite and Pierre Devolder

Risks 2021, 9(7), 127; https://doi.org/10.3390/risks9070127 - 3 Jul 2021

Cited by 8 | Viewed by 3014

Abstract

An increasing number of empirical studies have shown a positive relationship between lifetime income and life expectancy at retirement. One’s income during the active part of one’s career translates into the amount of retirement benefits one might receive, leading to actuarial unfairness inside cohorts of retirees. In order to discuss unfairness and sustainability issues, the Belgium pension reform committee issued a proposal for a point system designed to be both sustainable and adequate. In this paper, we use a similar defined benefit framework in order to set out a compensation mechanism linked to life expectancy heterogeneity during the active part of the career, aiming to reduce unfairness once reaching retirement. This method is based on the progressivity of pension benefit formulae. We implement these ideas in a simple demographic context in order to capture the constraints related to the model. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

28 pages, 684 KiB

Open AccessArticle

Automatic Indexation of the Pension Age to Life Expectancy: When Policy Design Matters

by Mercedes Ayuso, Jorge M. Bravo, Robert Holzmann and Edward Palmer

Risks 2021, 9(5), 96; https://doi.org/10.3390/risks9050096 - 13 May 2021

Cited by 30 | Viewed by 6013

Abstract

Increasing retirement ages in an automatic or scheduled way with increasing life expectancy at retirement is a popular pension policy response to continuous longevity improvements. The question addressed here is: to what extent is simply adopting this approach likely to fulfill the overall goals of policy? To shed some light on the answer, we examine the policies of four countries that have recently introduced automatic indexation of pension ages to life expectancy–The Netherlands, Denmark, Portugal and Slovakia. To this end, we forecast an alternative period and cohort life expectancy measures using a Bayesian Model Ensemble of heterogeneous stochastic mortality models comprised of parametric models, principal component methods, and smoothing approaches. The approach involves both the selection of the model confidence set and the determination of optimal weights. Model-averaged Bayesian credible prediction intervals are derived accounting for various stochastic process, model, and parameter risks. The results show that: (i) retirement ages are forecasted to increase substantially in the coming decades, particularly if a constant period in retirement is targeted; (ii) retirement age policy outcomes may substantially deviate from the policy goal(s) depending on the design adopted and its implementation; and (iii) the choice of a cohort over period life expectancy measure matters. In addition, the distributional issues arising with the increasing socio-economic gap in life expectancy remain largely unaddressed. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

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14 pages, 406 KiB

Open AccessArticle

Improving on Defaults: Helping Pension Participants Manage Financial Market Risk in Target Date Funds

by John A. Turner and Bruce W. Klein

Risks 2021, 9(4), 79; https://doi.org/10.3390/risks9040079 - 19 Apr 2021

Cited by 3 | Viewed by 2874

Abstract

The central issue of this paper is analysis and resulting proposals to help unsophisticated pension participants achieve pension portfolios that match their level of risk aversion when there is a large amount of unexplained heterogeneity in risk aversion. Target date funds are commonly used as the default investment in defined contribution plans in the U.S., UK and other countries. These funds recognize that individuals usually should hold less risky investment portfolios as their expected retirement date approaches because their ability to bear financial market risk declines as the time horizon decreases. However, these funds do not account for differences in risk aversion among people with the same target date. Empirical studies find large amounts of unexplained heterogeneity in risk aversion. Target date funds cannot deal with this issue simply by sorting people into demographic groupings, other than age, that are known to affect risk aversion, such as gender. Financial education can help people do a better job of managing financial market risk in their pension portfolios, but we argue that it is unreasonable to expect millions of pension participants to attain advanced levels of financial literacy. This paper considers three innovations in target date funds that can help individual pension participants do a better job of managing financial market risk. The analysis can be applied to other situations where defaults are used for investing pension participants’ portfolios. The paper suggests new lines of research relating to individual differences in risk aversion. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

32 pages, 694 KiB

Open AccessArticle

The Outlines of a Possible Pension System Funded with Human Capital

by József Banyár

Risks 2021, 9(4), 66; https://doi.org/10.3390/risks9040066 - 6 Apr 2021

Cited by 4 | Viewed by 2998

Abstract

The broadly used pay-as-you-go (PAYG) pension system is intrinsically wrong. The essence of the problem is that the PAYG system distributes the yield of raising children, i.e., of human capital investment (which is essentially the pension contribution), in such a way that it disregards the extent to which individuals have contributed to this, and even whether it has occurred at all. This error can be corrected if we take the pension contribution to be the yield on an investment of human capital, and as such use this to pay back the costs and expenses of the raising of the contribution payer—overall to those who paid these costs and expenses at the time. Accordingly, the central question of my study is whether it is possible to construct a consistent pension system based on the above foundations, and how my ideas may be inserted into the Diamond–Samuelson model. The method of the study was logical analysis and the construction of a theoretical mathematical model. The results of the study show that it is possible to construct a public pension system that operates according to a different logic than today’s system, a system which is free from the effects of demographic fluctuations, which does not motivate the refusal to have children, and which will remain self-sufficient under all circumstances. The study achieves this by presenting a possible pension system of this kind in detail. Via the suitable modification of the Diamond–Samuelson model, I have succeeded in showing that the pension system I am proposing increases the willingness to have children up to the social optimum, in contrast to the fully (but traditionally) funded and PAYG systems. This system currently only exists in theory and may be regarded as a major theoretical innovation, which naturally has certain (although not particularly extensive) antecedents. Its introduction could enable the resolution of the contradictions of existing pension systems and could also provide a solution to the as yet unsolved problem of the increasingly expensive regeneration of human capital, and as such, its potential practical implications are immeasurable. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

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13 pages, 916 KiB

Open AccessArticle

Impact of Income on Life Expectancy: A Challenge for the Pension Policy

by Damian Walczak, Jacek Wantoch-Rekowski and Robert Marczak

Risks 2021, 9(4), 65; https://doi.org/10.3390/risks9040065 - 2 Apr 2021

Cited by 9 | Viewed by 5225

Abstract

The aim of this paper is to present life expectancy of both genders depending on their income and to determine the impact of a possible regularity on the state pension policy. The study was based on the income of pensioners in Poland (over 5 million people receiving old-age pension). The results obtained made it possible to formulate several important conclusions: the rich live longer; the impact of income on life expectancy is much stronger among men than women; and with age, income has less and less impact on life expectancy. Consequently, in the capital model that is in force in Poland, the state should take this fact into account in its pension policy when calculating the amount of the benefit. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

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28 pages, 1182 KiB

Open AccessArticle

Immunization Strategies for Funding Multiple Inflation-Linked Retirement Income Benefits

by Cláudia Simões, Luís Oliveira and Jorge M. Bravo

Risks 2021, 9(4), 60; https://doi.org/10.3390/risks9040060 - 25 Mar 2021

Cited by 12 | Viewed by 4376

Abstract

Protecting against unexpected yield curve, inflation, and longevity shifts are some of the most critical issues institutional and private investors must solve when managing post-retirement income benefits. This paper empirically investigates the performance of alternative immunization strategies for funding targeted multiple liabilities that are fixed in timing but random in size (inflation-linked), i.e., that change stochastically according to consumer price or wage level indexes. The immunization procedure is based on a targeted minimax strategy considering the M-Absolute as the interest rate risk measure. We investigate to what extent the inflation-hedging properties of ILBs in asset liability management strategies targeted to immunize multiple liabilities of random size are superior to that of nominal bonds. We use two alternative datasets comprising daily closing prices for U.S. Treasuries and U.S. inflation-linked bonds from 2000 to 2018. The immunization performance is tested over 3-year and 5-year investment horizons, uses real and not simulated bond data and takes into consideration the impact of transaction costs in the performance of immunization strategies and in the selection of optimal investment strategies. The results show that the multiple liability immunization strategy using inflation-linked bonds outperforms the equivalent strategy using nominal bonds and is robust even in a nearly zero interest rate scenario. These results have important implications in the design and structuring of ALM liability-driven investment strategies, particularly for retirement income providers such as pension schemes or life insurance companies. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

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22 pages, 1858 KiB

Open AccessArticle

Life Expectancy Heterogeneity and Pension Fairness: An Italian North-South Divide

by Fabrizio Culotta

Risks 2021, 9(3), 57; https://doi.org/10.3390/risks9030057 - 18 Mar 2021

Cited by 8 | Viewed by 3249

Abstract

This work documents a persistent life expectancy heterogeneity by gender and geography in Italy during the period 1995–2019. Based on deviations of life expectancy at age 65, it quantifies the implicit tax/subsidy mechanism triggered when pensions annuities are computed by adopting the same value of longevity for the whole population. The intensity of this transfer mechanism is then measured and projected over the decade 2020–2030. Results show that females are subsidized while males are taxed by around

10 %

. Differences by geography persist along the Italian territory. Since 1995 the macroarea of Mezzogiorno has been taxed by

2 %

, Center and North-West macroareas are being subsidized by around

1 %

, whereas North-East by

2 %

. The intensity of the mechanism, despite decreases over time, is higher among females since the year 2000. From a geographical perspective, the macroarea of Mezzogiorno shows the lowest intensity, but also the lowest reduction as compared to other macroareas. Projections indicate that the North-South divide in this implicit transfer mechanism will persist over the next decade. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

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17 pages, 3366 KiB

Open AccessArticle

Calibration of Transition Intensities for a Multistate Model: Application to Long-Term Care

by Manuel L. Esquível, Gracinda R. Guerreiro, Matilde C. Oliveira and Pedro Corte Real

Risks 2021, 9(2), 37; https://doi.org/10.3390/risks9020037 - 8 Feb 2021

Cited by 5 | Viewed by 4110

Abstract

We consider a non-homogeneous continuous time Markov chain model for Long-Term Care with five states: the autonomous state, three dependent states of light, moderate and severe dependence levels and the death state. For a general approach, we allow for non null intensities for all the returns from higher dependence levels to all lesser dependencies in the multi-state model. Using data from the 2015 Portuguese National Network of Continuous Care database, as the main research contribution of this paper, we propose a method to calibrate transition intensities with the one step transition probabilities estimated from data. This allows us to use non-homogeneous continuous time Markov chains for modeling Long-Term Care. We solve numerically the Kolmogorov forward differential equations in order to obtain continuous time transition probabilities. We assess the quality of the calibration using the Portuguese life expectancies. Based on reasonable monthly costs for each dependence state we compute, by Monte Carlo simulation, trajectories of the Markov chain process and derive relevant information for model validation and premium calculation. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

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19 pages, 1222 KiB

Open AccessArticle

Myopic Savings Behaviour of Future Polish Pensioners

by Sonia Buchholtz, Jan Gąska and Marek Góra

Risks 2021, 9(2), 36; https://doi.org/10.3390/risks9020036 - 6 Feb 2021

Cited by 6 | Viewed by 3408

Abstract

Low saving rates combined with low effective retirement age herald old-age poverty. This paper examines the preferred strategies of future Polish pensioners in order to sustain the standard of living in the future. A two-step approach is used: as a first-best strategy, we explore determinants of supplementary saving with binary logistic models; as a second-best strategy, we examine alternative options with principal component analysis. Future retirees rarely accumulate long-term savings, do not use dedicated instruments, and they start to save additionally far too late. Savings are concentrated in wealthier and better educated groups. Such myopia is governed by their political stance and not by awareness of dire prospects. Second-best strategies are based on optimistic assumptions about future health (seeking for additional jobs), on the assumed generosity of acquaintances or social institutions (relying on external assistance), or on rebelling. Given the increasing political power of elder generations, balancing the interests of workers and retirees will be an increasingly difficult task for policy makers. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

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17 pages, 1614 KiB

Open AccessArticle

Enhancing Pension Adequacy While Reducing the Fiscal Budget and Creating Essential Capital for Domestic Investments and Growth: Analysing the Risks and Outcomes in the Case of Greece

by Georgios Symeonidis, Platon Tinios and Panos Xenos

Risks 2021, 9(1), 8; https://doi.org/10.3390/risks9010008 - 29 Dec 2020

Cited by 4 | Viewed by 3543

Abstract

Many countries around the world are resorting to mandatory funded components in their multi-pillar pension systems with the purpose of catering for the financial pressure from ageing. This paper aims at analysing the possible replacement rates for such a scheme, by choosing different assumptions and setting the best combined area for the expected result. Then, an approach for analysing the potential for the implementation of such a scheme in Greece is presented along with the actuarially projected expected benefit expenditure and respective accrued capital. A result of the introduction of such a component is expected to be the elevated replacement rate at retirement with a concurrent alleviation of the fiscal burden for the state. The projected scale of savings will also provide domestic financing for investments generating growth. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

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21 pages, 2741 KiB

Open AccessArticle

The Sustainability Factor: How Much Do Pension Expenditures Improve in Spain?

by Enrique Devesa, Mar Devesa, Inmaculada Dominguez-Fabián, Borja Encinas and Robert Meneu

Risks 2020, 8(4), 134; https://doi.org/10.3390/risks8040134 - 7 Dec 2020

Cited by 2 | Viewed by 2660

Abstract

The reform of 2013 represented a qualitative leap in the reform of the Spanish pension system. Unlike its predecessors, it introduced two automatic resetting mechanisms similar to those of other European countries. The first is the sustainability factor, scheduled to come into effect in 2019 but delayed until 2023, and its ultimate reversal cannot be ruled out. The objective of this study was to quantify the savings, or the lowest expenditure, that can be achieved in the Spanish public contributory pension system by applying it. These savings are measured in terms of cash—of annual expenditure—and in terms of accrual by calculating its present actuarial value. Combining these two methods is one of the contributions of this work. This work was only intended to analyze the impact of the Sustainability Factor, therefore, it did not take into account the impact of the Pension Revaluation Index, which is the second mechanism introduced in the reform of the pension to 2013. An ad hoc projection method was used, combining microdata from the Continuous Sample of Working Lives (MCVL), aggregate data from the pension system, the financial-actuarial projection method, and actuarial techniques. The diversity of the data used is the second contribution of this work. The application of the sustainability factor would improve the viability of the system, since the savings that could be achieved, measured in terms of GDP for each year, would be 1.029% by 2050; 1.094% in 2057, the maximum; and 1.026% in the last year of projection. In terms of the present actuarial value and as a function of annual GDP, in 2050, the savings would be 1.27%, 1.40% in 2044, the maximum, and in 2067 it would decrease to 0.98%. Full article

(This article belongs to the Special Issue Pension Design, Modelling and Risk Management)

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