Taskforce on interest rate and conversion risk in pension contracts

The authors of this paper investigate whether the option to delay annuitization in times of low interest rates has value for retirees. The retiree who chooses to wait bets on a fall in the annuity price brought about by a raise in the interest rates; the cost of such a bet is the loss of the mortality credit during the waiting period. They will show that waiting is never ex-ante profitable if annuities are fairly priced, because waiting is costly and buying a fairly-priced annuity is a zero-npv project. A retiree may choose to wait, however, if she believes her views are not priced in the term structure. For such a retiree, waiting is optimal if the expected increase in the interest rate is larger than the square of the hazard rate.