Author: Marilyn

Abstract

Since 2011 ongoing improvements in life expectancy and the mortality rate have been interrupted leading to the failure of actuarial models and higher than expected life insurance pay-outs. This has occurred to varying degrees across all the developed countries. This study presents evidence that deaths follow a curious pattern of on/off switching which can be demonstrated to occur in the 126 countries where monthly deaths data is available for analysis. This on/off switching can be documented to occur from the 1980’s to the present. At switch-on monthly deaths suddenly jump to a new and higher level, remain high for around 12-months, and then suddenly revert to the former baseline where they stay until the next switch-on event arrives. Switch-on can seemingly occur in any month of the year, i.e. factors such as season and temperature can be excluded as causes for the behaviour, with the magnitude of the increase diminishing as the spatial area increases. On average, switch-on occurs around once evert three years. At an international level switch-on appears to cluster in time. Attempts to investigate period and cohort effect using calendar year data will therefore be hindered since a calendar year can contain a mix of on/off behaviour. Artefactual outputs from the method were excluded by analysis of monthly temperature and sunspot numbers.  

Key Words

On/off switching; deaths; actuarial models; period and cohort effects; life insurance costs  

Summary

This article considers whether a collective defined contribution pension scheme (a “CDC scheme”) provides “cover against biometric risk” or “guarantees … a given level of  benefits” for the purposes of Article 13(2) of EU Directive 2016/2341 (the “IORP II Directive”) or  its predecessor , IORP I Directive  2003/41/EC), Article 15(2). If no such cover and no such guarantee are provided, then a CDC scheme is not required to comply with the technical provisions, buffer and other funding requirements applicable to an IORP which is classified as a “regulatory own fund” in Article 15 of the IORP II Directive. There is a linked, and for current practice, relevant issue: if a pension fund operates a CDC pension scheme that does not qualify as a regulatory own fund IORP, it would be classified as a “special investment fund” for EU VAT Directive purposes with the associated beneficial VAT treatment that is enjoyed by a retail collective investment scheme. Furthermore this VAT treatment is available for all CDC schemes. The article explores this issue by reference to CDC schemes established in The Netherlands and against the background that the UK is planning to introduce legislation permitting CDC schemes to be established in the UK. The article compares some of the Dutch legislation regulating CDC schemes established in The Netherlands with the corresponding position in the UK in relation to the legal form used for a pension scheme, the protection of accrued rights under a pension scheme, the approach to funding defined benefit pension schemes (including, for this purpose, Dutch CDC schemes) and the different approaches to dealing with the insolvency of the employer in relation to a pension scheme (including the difference between the UK legislation for a Pension Protection Fund and The Netherlands not legislating for a pension protection fund). The article also notes that the essence of a CDC scheme is that the benefits are not guaranteed. Instead, the benefits are adjusted in accordance with legally binding rules which provide a mechanism for bringing the value of the target benefits back into line with the value of the assets of the scheme. The employer has no obligation to make any additional deficit repair contributions. The article notes that CDC schemes may also be referred to as Defined Ambition schemes or Target Benefit schemes.

Abstract  

We examine the determinants of firms’ defined pension plan de-risking strategy choices, and their impact on firm risk using a unique dataset covering FTSE 100 firms for the period 2009-2017.  In particular, we investigate which firm financial and pension fund characteristics influence de-risking strategy choices and their impact on firm risk, proxied with earnings and return volatility, default and credit risk.  Results show that de-risking strategies are more likely to be implemented when pensions have a longer investment horizon, indicating a higher level risk exposure due to investment uncertainty.  We find that firms with larger pension plans prefer innovative de-risking strategies (buy-in/buy-out and longevity swap), as these reduce the risk more effectively removing various pension fund risk altogether, over the traditional ones (soft and hard freezing).  Firms with higher market capitalisation and that are financially unconstrained implement innovative pension de-risking strategies as they have the ability to pay the cash premiums required.  We also find that pension de-risking strategies reduce firm risk.  Hard freezing and pension buy-ins/buy-outs have the most significant impact in reducing firm risk.  In contrast, soft freezing nd longevity swaps tend to have a weaker or no impact on the overall firm risk.

Keywords

Pension De-Risking Strategy, Defined-Benefit Pension Plans, Pension Freezing, Pensing Buy-in, Pension Buy-out, Longevity Swap.

 

Abstract

The paper examines the cointegration between pension assets and economic growth in the presence of structural breaks in 1995 and 1999. The structural breaks are endogenously determined. This paper gives an extensive literature review of the theoretical and empirical framework of pension fund reform in relation to growth. The literature shows pension fund reform has been encouraged with some emerging market economies including South Africa shifting from Pay As You Go (PAYG) to Fully Funded Schemes (FFS). The Zivot Andrews and modified ADF unit root test are used, and empirical evidence suggests no evidence of a unit root. This paper examines the cointegration between pension assets and economic growth in the presence of structural breaks. We find that pension assets have a positive but minimal impact on growth in the presence of structural breaks. The direction of the results is similar for the model with or without structural breaks. The results show that pension reform in South Africa has not contributed to a redistributive growth agenda despite the financial sector sophistication coupled with the strong institutional and regulatory framework.

Keywords

Pension Funds Reform, South Africa, structural breaks, PAYG to FFS, ARDL, Zivot Andrews  

Abstract

Persons who have achieved UK state pension age (SPA) may defer their pension and instead receive an extra pension on termination of deferral. We define a scheme to be actuarially fair to a category of deferrer with agreed discount rate, when the expected net present value of pre-tax lifetime receipts is independent of the deferral period. After a review of the literature on deferral and early take-up of state pensions in the UK and other countries, this paper argues that the current UK scheme based upon a uniform accrual rate cannot be actuarially fair. Instead, we propose a scheme where the accrual rate is dependent upon deferral period, gender, SPA, deferrer’s discount rate, degree of pension uprating, and partnership status of the deferrer. Fair accrual rate curves are plotted for various scenarios and compared with the current uniform rates of 10.4% and 5.8% per annum that apply to those who attain SPA before 6 April and after 5 April 2016 respectively. A scheme that is actuarially fair will not be cost neutral to the Exchequer unless the discount rate is the same for both parties. In addition to this asymmetry, adverse selection will impact upon both actuarial fairness and cost to the Exchequer. Expressions are derived for the cost penalty to the Exchequer for attempting to achieve actuarial fairness both with and without an acknowledgement of adverse selection. Similarly, when the objective is to achieve cost neutrality for the Exchequer, expressions for the cost to the deferrer are obtained. Some numerical examples are given for various scenarios. The methodology should be applicable to public pensions in other countries, in order to inform fair policies for both early and postponed take-up of pensions.

Keywords

UK State pension, deferral, actuarial fairness, cost neutrality, adverse selection, discount rate