Pension deferral with reference to actuarial fairness, cost neutrality, and adverse selection; a UK perspective
Pension deferral with reference to actuarial fairness, cost neutrality, and adverse selection; a UK perspective
Persons who are eligible for a defined benefit social security pension may defer their pension and receive, through accruals, an extra pension or possibly a lump sum, on termination of deferral. In certain cases, partners of the deferrer may inherit such benefits. For such a scheme, the concept of actuarial fairness to a category of pensioners is defined. A scheme that is actuarially fair will not be cost neutral to the pension provider 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 provider. Expressions are derived for the cost penalty to the provider 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 provider, expressions for the cost to the deferrer are obtained. Some numerical examples are given in the case of the UK state pension scheme. Under present rules it is shown that there are significant departures from actuarial fairness, particularly for those who achieved state pension age before 6 April 2016 and those with partners eligible to inherit benefits. Even when a pension provider attempts to achieve either actuarial fairness or cost neutrality, if adverse selection is ignored, then significant departures from both are quite possible.
Dagpunar, John
be796c6f-4b91-462b-b7ef-c9387efc26dc
Dagpunar, John
be796c6f-4b91-462b-b7ef-c9387efc26dc
Dagpunar, John
(2020)
Pension deferral with reference to actuarial fairness, cost neutrality, and adverse selection; a UK perspective.
SSRN Electronic Journal.
(doi:10.2139/ssrn.3726919).
Abstract
Persons who are eligible for a defined benefit social security pension may defer their pension and receive, through accruals, an extra pension or possibly a lump sum, on termination of deferral. In certain cases, partners of the deferrer may inherit such benefits. For such a scheme, the concept of actuarial fairness to a category of pensioners is defined. A scheme that is actuarially fair will not be cost neutral to the pension provider 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 provider. Expressions are derived for the cost penalty to the provider 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 provider, expressions for the cost to the deferrer are obtained. Some numerical examples are given in the case of the UK state pension scheme. Under present rules it is shown that there are significant departures from actuarial fairness, particularly for those who achieved state pension age before 6 April 2016 and those with partners eligible to inherit benefits. Even when a pension provider attempts to achieve either actuarial fairness or cost neutrality, if adverse selection is ignored, then significant departures from both are quite possible.
This record has no associated files available for download.
More information
Accepted/In Press date: 10 March 2020
e-pub ahead of print date: 10 March 2020
Identifiers
Local EPrints ID: 454572
URI: http://eprints.soton.ac.uk/id/eprint/454572
PURE UUID: df11b09b-970e-4bfe-9027-6a5b4413847e
Catalogue record
Date deposited: 16 Feb 2022 17:39
Last modified: 21 Mar 2024 17:41
Export record
Altmetrics
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics