Macro longevity risk and the choice between annuity products: Evidence from Denmark

We study a unique data-set containing individuals who were given the opportunity to substitute a guaranteed pension product with relatively low levels of risk for a market-sensitive pension product with both a higher degree of financial risk and exposure to macro longevity risk. Implicitly there is a longevity hedge built into the guaranteed product that is abolished when one switches to the market-sensitive product. The analysis shows that situations might arise where expected pension payments in the market-sensitive product fall below expected pension payments in the guaranteed product, despite the fact that the former has a higher expected return from financial assets. We find that young male residents of Copenhagen with a degree in economics who are guaranteed a low return on their pension savings and have moderate pension wealth are more likely to switch to the market-sensitive pension product.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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