Hear from a researcher: Anne Balter “Calculations with impact”

“Calculations That Have an Impact”

The retirement landscape is heavily in flux, with ever-new questions in need of answers. Science plays an important role in that, as do young new researchers who approach pension and retirement research with a fresh eye. In this series, we ask them about their motivations and findings. This time, we hear from Dr. Anne Balter (TiU). She calculated that while earlier receipt of pension benefits does not lead to much of a drop in income after five or ten years, it does in the longer term. That insight prompted a change in the Improved Defined Contribution Scheme Act. “Nice to see that my calculations had a direct impact,” she says.

“I was already involved in pension research as a junior researcher when I was doing my PhD. I studied econometrics and opted for the actuarial side of things. During my doctoral program in Maastricht, I researched model uncertainty and how it affects pensions. With that kind of background, it would be strange if you didn’t end up interacting with Netspar.”

Better Choices
“In short, my Individual Research Grant from Netspar focused on the financial repercussions for people who choose to continue in risky investments for their remaining pension assets after retirement, which only became allowable in the Netherlands in 2016. Bas Werker and I studied how the distribution of those assets over future lifetime affected benefits. We showed that when people receive a portion of their pension earlier, any noticeable negative effect on pension benefits does not become evident until after about twenty years. The Improved Defined Contribution Scheme Act specified that only the effect after the first five to ten years had to be communicated, a period during which you will see relatively high benefits. Given that people are living much longer, as a rule, that thus brings considerable risk. As a result of our research, the law was modified and the consequences after twenty years must now also be shown. While it remains difficult to look so far ahead, it does allow people to make better choices. The fact that my research has an immediate impact feels meaningful. I love math and calculations, but it needs to actually lead to something.”

Uncertainty
How do you go about such a complicated calculation? “I usually start with pen and paper and write down a concrete example (numbers or algebraic) to get a sense of the problem, then I work out the example. Since we cannot know what the future will bring, we use a stochastic model. Such models incorporate the uncertainty about the future. However, we know that even including risk is not enough. That’s where it becomes complicated, because the world cannot be captured in a mathematical model. No matter how many scenarios you consider, it is still only one model. And how do you know if it was the best choice? I examine strategies that incorporate this model uncertainty and minimize the risk of large errors. For this research project, I visited Nobel Prize winner Lars Hansen in the U.S., who is an expert on the robustness of mathematical models. As a result of that visit, he ended up coming to the Netherlands to give a lecture at Netspar together with Gisella van Vollenhoven (DNB) and Wouter Koolmees (Minister of Social Affairs and Employment), which was fantastic, of course.”

A Fairer System
“The pension world doesn’t stand still, especially now, with the new contract. How are we going to enact the new pension contract? We plan to conduct further research into how to answer the new, interesting issues related to it, such as the spreading of risk and distribution of returns. Those are technical issues that start with theory. The great thing about Netspar is that it doesn’t end there, though. You are asked to translate the content so that it also appeals to politicians or journalists and a wider audience. The best thing is that, as a result, you really are contributing something.”

Want to know more?

Dr. Anne Balter is an assistant professor at Tilburg University. She completed her Individual Research Grant, titled “Contractspecificaties voor nieuwe pensioenovereenkomsten” (Contract Specifications for New Pension Agreements), in 2019 at Netspar.

Read the Industry Paper “Het effect van de vaste daling en het smeren van schokken op variabele uitkeringen” (The Effect of the Fixed Reduction and Shock Spreading on Flexible Benefits) here.