A comparison of modern investment-linked pension savings products

Abstract

This paper is a continuation of and a supplement to the paper by Jørgensen & Linnemann. Both papers deal with TimePension – a (formula-based) smoothed investment-linked annuity pension scheme. Both papers compare TimePension with other pension savings products using stochastic financial simulation. TimePension as well as the financial model and simulation concept being used in both papers were introduced in the paper op cit.Jørgensen & Linnemann compare TimePension with a traditional with-profits scheme involving bonus entitlement and an investment-linked Unit Link scheme with a fixed proportion of assets invested in equities and other so-called risky assets. Here, TimePension is compared with two investment-linked life-cycle (target date) products. The focus is especially on the decumulation period, and we show that despite the fact that the life-cycle products reduce investment risk in retirement (compared with TimePension’s fixed proportional allocation of assets), the year-over-year stability in benefits provided by TimePension cannot be matched. Even though the overall investment risk on accumulated benefits is at the same level, TimePension provide year-over-year stability, also in case of sharp price changes in the financial market.Our results show that not only investment profiles define the stability of annuity benefits over time. In addition, more fundamental elements of the product design are important. The perspective on product design and development is Danish, but two of the compared products are generic life-cycle products that exist in equivalent forms in many countries. Similarly, the smoothed income annuities could also become an alternative product design in an international perspective.

Affordable and adequate annuities with stable payouts: Fantasy or reality?

“…In the case of a standard unit-linked annuity contract, insurers fully translate portfolio shocks into current payouts. Hence, after the stock return shock has occurred, the payout 17 See also Jørgensen and Linnemann (2011), Guillén et al (2013), and Linnemann et al (2014). 18 The federal funds rate, which is the most important interest rate in the US, currently (i.e., March 2018) equals 1.5%.…”

The Impact of Guarantees on the Performance of Pension Saving Schemes: Insights from the Literature

“…Jørgensen and Linnemann [27] compare the performance of a traditional with-profits scheme to a pure unit-linked contract and a formula based smoothed investment-linked annuity scheme that was first introduced in the Danish market in 2002 with the name "TimePension" (see Guillé n, Jørgensen, and Nielsen [12]; Linnemann, Bruhn, and Steffensen [39]). They, thereby, take both, the accumulation as well as the decumulation phase into account.…”

The design of pension contracts: on the perspective of customers

“…(2006), Jørgensen & Linnemann (2012), Linnemann et al . (2015), Døskeland & Nordahl (2008 b ) and Chen et al . (2015).…”

“… 3 This contract is discussed by Guilléen et al (2006), Jørgensen & Linnemann (2012) and Linnemann et al . (2015). …”