In this paper, various annuity types and the welfare implications for defined contribution schemes in the Dutch pension system are investigated. The optimal annuity decision between three basic annuity types is explored, and the main finding is that the inclusion of variable annuities (where the payoff depends on equity market performance) to the asset menu substantially increases welfare under a wide range of assumptions. The welfare effects of inflation protected annuities in the presence of variable annuities are limited. This is not because the variable annuity moves along with unexpected inflation. Instead, the compounding equity returns safeguard the investor from unexpected inflation in most instances. The main findings have implications for the current Dutch pension system design, where variable annuities should play a bigger role than they currently do. Furthermore, the often ascribed advantages of inflation protected annuities in retirement are not found in the model. The recommendation that the government should issue inflation linked bonds to provide a market for real annuities is not supported by the quantitative model.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

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