Flexibility in decumulation: Beneficial or not?
Pension decumulation is organized as such to maintain the standard of living of an individual.Now what if we decide to organize it differently? We propose an alternative decumulation scheme, in which participants receive a different pension pay-out during retirement, as research has shown needs decrease whilst one ages. The specific alternative decumulationscheme examined here comprises a temporary annuity-due with a higher benefit and a whole life annuity-due with a lower benefit. Does this alternative scheme provide a better match?To investigate, we want to determine whether the alternative decumulation scheme decreases the mismatch risk between pension income and needs. Therefore, we analyse the effects of big changes in the inflation rate, interest rate, mortality rate and the healthcare costs, on both the pension income and the needs of the individual participant. Next to these large changes, we also generate a realistic scenario for the abovementioned variables. Based on the outcomes of the analysis, we compare the pension income and needs over the next thirty years, for different groups of people in the Netherlands.We find two important results. First of all, the level of pension income in the alternative scheme proves to be less volatile with respect to shocks in the economic variables as mentioned, compared to the level in the standard scheme. Second of all, the suitability of the alternative decumulation scheme as proposed depends on the height of the accumulated pension benefit. The higher this benefit, the lower the probability of mismatch risk for the participant. From the realistic scenario, based on a thousand generations, we can conclude that the alternative scheme is optimal for the average man in the Netherlands, both Dutch-born as well as immigrated, and for the participants of a specific pension fund examined, the pensionfund for medical specialists. The average Dutch woman, on the other hand, in general has a too low accumulated pension benefit for the alternative scheme to be advantageous.We advise pension funds to offer the alternative decumulation scheme, as proposed, to participants, taking into account their specific characteristics. Based on these characteristics, one can determine whether the height of the benefit is sufficient, for the alternative scheme to provide a better match, and provide an individually-tailored pension decumulation to retirees.