2023 Australasian Actuarial Education and Research Symposium

Eugene Tan

Australian National University

Flexibility and selection effects in modern tontines

This is joint work with Adam Butt, Gaurav Khemka

Due to the recent financial crisis and increased longevity, pension systems with guaranteed benefits are no longer sustainable. Therefore, there has been a significant shift from defined benefits pension schemes to defined contribution pension schemes, often without the same level of guarantees. In Australia, retirees tend to over-rely on account-based pensions (ABP) which are less efficient in converting superannuation assets to retirement incomes. Despite the active effort by the Australian government and the advantages of delivering a guaranteed income, annuity sales in the Australian market remain low. Weighing the immense pressure on Australia's retirement income system, there is increasing discussion on the merits of modern tontines in the Australian context and growing interest in the concept of mortality risk sharing. This paper examines the impact of heterogeneity in the tontine pool, the selection effects exhibited by the pool members and the choices made by the model policyholder when flexibility such as investment options and variable drawdown amounts are introduced. To examine each of them separately, we are able to isolate the effects on the mortality credits received by the model policyholder, caused by the pool heterogeneity and selection effects from the underlying mortality risk. Furthermore, we are able to identify and study the sources of variability in the regular tontine payments received by a member. As such, this gives us the opportunity to compare and contrast the effect of various pool heterogeneity, selection effects and choices made by the model policyholder.