IPRA sponsored Online Session of the 32nd Colloquium on Pensions and Retirement Research

Abstracts 

Session 1: Health, Longevity and Pension Sustainability

How Health and Longevity Information Shapes Financial Advice

Abigail Hurwitz (The Hebrew University of Jerusalem, Israel)

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Abstract: When making key financial decisions like saving for retirement, claiming Social Security, annuitizing or deciding how to invest funds, many people consider their health and life expectancy. Nevertheless, these assessments are frequently inaccurate or biased. Professional advisors can help mitigate these biases, yet some could be influenced by their own interests or biases. To explore how health and longevity information impacts financial advice, we conducted two online experiments: one with the general public and another with professional advisors.
These experiments examined whether advisors rely more on their own health and longevity or on the health and longevity information provided about their clients when making recommendations. Both amateur and professional advisors were found to be more influenced by client-specific health information than by their survival probabilities. Yet the amateurs were more reactive to straightforward health details, like a severe cancer diagnosis, while professionals adjusted their recommendations based on a broader range of information.
We show that providing specific health and longevity information about clients significantly influenced the recommendations given by both groups, especially regarding annuitization. For instance, when informed about a client’s severe health condition, professional advisors were much less likely to recommend annuitization. This suggests that professional advisors are better at integrating detailed health and longevity data into their advice compared to amateurs.
While informal advice from friends or family may be common, our research also documents that amateur advisors can lack the expertise to effectively incorporate crucial health and longevity information into their financial recommendations. This underscores the need for improved longevity literacy among the general population and further research into how professional advisors can best align their advice with clients' needs.

Lifestyle Intervention to Promote Elderly Workers’ Mental Health and Productivity: An Analysis of Data from Corporate Health Insurance Claims and Wearable Devices

Yoshihiko Suzawa (Kyoto Sangyo University, Japan)

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Abstract:
[Background] To achieve a vibrant, long-lived society, it is essential that elderly workers work productively while maintaining stress resilience over a long lifetime. Since the literature established that maintaining a favorable mental state improves workers’ performance, corporate H&PM (health and productivity management) programs started focusing on maintaining employees’ mental health. Health insurers began offering H&PM services to corporate policyholders in combination with insurance coverage. Following the medical finding that lifestyle habits have a significant impact on mental state, some insurers provide consultations on lifestyles to insured workers by analyzing information collected from devices worn by insureds.
[Purpose] This study explores what intervention to modify lifestyles an employer and its insurer should make to improve mental health and performance of elderly employees.
[Methodology] We constructed a logistic regression model targeting onset and aggravation of mental illnesses, and applied it to large-scale public corporate health insurance claims data from Japan combined with lifestyle data collected via wearable devices of workers up to 74 years old.
[Results] The preliminary analysis revealed that having a daily sleep duration exceeding seven hours was positively related to the onset of depressions. It also recognized the possibility that short sleep duration (<6 hours) and long social jetlag (>2 hours) may aggravate mental illness. We recognized that insufficient weekly exercise time (<150 min.) can also trigger depressive symptoms.
[Conclusions] The results suggest corporate managers and their health insurers to utilize wearable device to collect insured employees’ data of time to go to bed/wake up to identify sleep duration and social jetlag in addition to exercise time. They should then intervene the insureds to achieve the targeted levels of sleeping and exercise times as well as social jetlag based on our analytical results when designing H&PM program.
[Keywords] Elderly workers, health and productivity management, mental health, lifestyle habits

Intergenerational Actuarial Fairness in Pay-As-You-Go Pension Schemes

Jingwen Zhang (College of Finance and Statistics, Hunan University, China)

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Abstract: Recent trends such as declining fertility rates, and increasing life expectancy all point to a substantial increase in the age dependency ratio, and this will raise serious concerns about the sustainability of PAYG pension systems in many countries. As a result of this, parametric reforms that entail adjustments in benefits and contributions have been debated or undertaken in many countries worldwide. However, reforms aimed at improving financial sustainability, such as raising contributions or reducing benefits, may disproportionately burden younger generations, raising concerns about intergenerational fairness. This paper proposes a general framework for measuring intergenerational actuarial fairness, considering both scenarios with and without a buffer fund. Using the theoretical model, we identify the factors influencing intergenerational actuarial fairness and compare their effects in pure DB, pure DC, and hybrid pension schemes. Numerical analysis is then presented to illustrate how demographic changes, along with variations in key parameters affect fairness across different cohorts.

The Effect of Financial Literacy on Perceived Retirement Saving Among Public University Employees in Kenya

Lucy Rono and Sheila Arusei (School of Business and Economics, Moi University, Kenya)

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Abstract: The adequacy of these retirement savings in Kenyan Public Universities is documented as inadequate in retirement literature. Factors such as low levels of financial literacy contribute to concerns about the financial security of public university employees upon retirement. This study sought to determine the effect of financial literacy on perceived retirement saving adequacy among public university employees in Kenya. Using Lifecycle theory, the study employed an explanatory research design. The target population comprised 17,320 employees from public universities in Nairobi, Kenya. Taro Yamane (1973) formula was used to obtain a sample size of 389 respondents. Data collection was carried out using closed-ended questionnaires. The results of the study showed that financial literacy had a significant impact on adequacy retirement savings adequacy (β=.664, p=.000). The study concludes that Kenyan public university workers will likely engage financial literacy programs and retirement savings plans if they perceive such actions will result in a comfortable retirement.

Session 2: Portfolio Choice and Retirement Benefits

When does Intra-Household Risk Sharing Matter for Lifecycle Portfolio Choice?

Joachim Inkmann (University of Melbourne, Australia)

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Abstract: Using a quantitative, collective life-cycle portfolio choice model with a realistically calibrated earnings process, we show that couples optimally invest a larger share of their financial wealth in risky assets than singles with equal resources, provided that partners differ in relative risk aversion. Our finding is driven by intra-household risk sharing. Efficient risk sharing implies a consumption sharing rule, which optimally allocates household consumption across partners such that the ratio of their marginal utilities of individual consumption remains constant. Traditional, unitary life-cycle portfolio choice models cannot replicate these results, which carry significant implications for the design of target date funds.

Welfare Effects of Uniform Variable Annuities for Individuals with Different Education Levels

Jun-Hee An (Tilburg University, The Netherlands)

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Abstract: This paper examines the welfare losses or gains that individuals with different educational levels face when they are offered a variable annuity that is not tailored to their risk preferences and/or survival rates. We combine education-specific mortality projections of the Dutch population with a range of reasonable risk preferences to quantify the welfare losses due to mismatches in mortality rates and risk preferences. We find that for individuals with lower education levels, the welfare losses due to inadequate mortality assumptions can be substantially bigger than the welfare losses they face from an inadequate risk preference assumption. More generally, we find that ignoring the effects of heterogeneity in mortality rates can lead to a large over- or underestimation of the welfare effects of uniform variable annuities. Our study therefore highlights the importance of considering differences in survival rates when evaluating the welfare effects of uniform annuities offered to annuitants with different educational levels.

Closing the Democratic Deficit in Pension and Superannuation Benefits

Gwion Moore (Australia)

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Abstract: The role of Environmental, Social and Governance policies (ESG) has been subjected to a great deal of criticism in the media over the past year. This article proposes alternative models for the governance of superannuation/pension funds and the companies that they invest in, whereby the voting rights from share ownership are returned to the members, who in turn exercise them directly or delegate their proxy to an organisation that aligns with their value system.
Under the current model that the sector utilises, superannuation members receive the economic benefits of asset ownership, however the political rights associated with asset ownership such as shareholder voting rights are typically left with the trustees of the superannuation fund. These political rights are potentially very powerful, influencing the direction of corporate policy, the make-up of corporate boards and executive compensation.
The ESG policies of superannuation schemes embed normative value systems that are undoubtably supported by a portion of scheme members, however they can inadvertently exclude and diminish the value systems of a wide range of members, particularly minority ethnic and religious groups. We believe an alternative model whereby the voting rights from share ownership are returned to the members, who in turn delegate their proxy to an organisation that aligns with their value system is superior.
Obviously the process of extending democratic rights to superannuation and pension fund members presents technical challenges. However companies offering technology solutions that would go much of the way to solving these technical challenges already exist. In Europe the Shareholder Rights Directive would make most technical steps legally mandatory.
We encourage the superannuation schemes in Australia to publicly support the inevitable move towards democratic rights in the superannuation sector, and call for cross-political party support for legislation to make provision of these rights mandatory for superannuation and pensions providers.

Occupational Pensions from a Tax Perspective: Comparative Insights from the EU

Emma Suzanne van Aggelen (Hasselt University, Belgium)

Abstract: In the EU, there is no uniformity between Member States in how pensions are taxed. The tax treatment of pensions thus varies considerably between countries. This presentation examines the current EU occupational pension landscape from a tax perspective and compares these findings with occupational pension tax regimes in non-EU systems, such as the US and Australia.

Session 3: Pensions, Sustainability and Retirement Income

On the Sustainability of the Canadian Model

Eduard van Gelderen (International School of Management, Canada)

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Abstract: Over the years different successful investment models have seen the light: the Yale model, the Norges model and the Canadian model. The latter is well-known in global pension markets and is praised for its performance and dedication to the pension promise. The genesis of the Canadian model dates back to the nineties when the Ontario Pension Plan was in urgent need of restructuring due to poor investment performance, bad governance and solvency issues. The principles put in place were the following: 1) strong governance with clear separation of responsibilities; always with the benefits for the retirees as the sole objective, 2) internalization of investments, 3) significant allocation to private assets, 4) enterpreneurial investing, and 5) providing patient capital. These principles were subsequently adopted by other large Canadian public pension plans, collectively called the Maple-8. The paper addresses two core questions. First, is the Maple-8 a homogenuous group as the label implies? The paper shows that fundamental differences exist between the eight institutions in terms of governance, clients and mandates. These differences determine to what degree the forementioned principles can be put in practice. The second question deals with the sustainability of the Canadian model. Although the Maple-8 have been successful in the past, it is not a given that this model will continue to produce the required results going forward. Government interference is looming, private markets are more mainstream than before and resilience is more important as baby-boomers will start to receive their pensions. The paper emphasizes the need for the Maple-8 to re-establish themselves as the guardians of the pension promise rather than Canadian development funds, to develop long-term risk management practices and to fully embrace the opportunities new technologies, including artificial intelligence, provide.   

Mortality, Regressivity and Pension Design

Ponpoje (Poe) Porapakkarm (National Graduate Institute for Policies Studies (GRIPS), Japan) and Svetlana Pashchenko (University of Georgia, USA)

Abstract: How should we compare welfare across pension systems in presence of differential mortality? A commonly used standard utilitarian criterion implicitly favors the long-lived over the short-lived. We investigate under what conditions this ranking is reversed. We show that when mortality is independent of income, mortality-progressivity can be optimal only when (i) there is more aversion to inequality in lifetime utilities compared to aversion to consumption inequality, (ii) life is valuable. When the short-lived tend to have lower income, mortality progressivity can be optimal when income redistribution tools are limited. In this case, mortality progressivity is used to substitute for income progressivity.

Pensions for Migrants – Leveraging the RENDA+ Success

Arun Muralidhar (Georgetown University, USA)

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Abstract: Since migrants typically come from developing countries, with weak currencies, and are considered informal workers in developed countries, with hard(er) currencies, they slip through the economic and social cracks. Even if they earn a reasonable income, they do not have access to the formal financial sector and hence have no retirement security (much like informal workers in developed or developing countries).
Brazil’s digitally-enabled, through Tesouro Direto , RendA+ retirement income bond , designed along the lines of the SeLFIES (Standard-of-Living indexed Forward-starting, Income-only Securities) bonds , and Educa+ education bonds, registered/custodied on a multi-national-maintained blockchain-based global registry/custodied, might provide the solution for this complex problem. We provide background on the migrant retirement security challenge, details on the economic and other challenges faced by migrants, a potential proposal to solve this global crisis and some technical, political challenges that could be overcome by a Multilateral Development Bank hosting the SIMPLE (Secure retirement Income for Migrants for Pensions in a Ledger Electronic) solution on the blockchain.

When I’m 64 (or thereabouts): Changes in Income from Middle Age to Old Age

Peter Brady (Investment Company Institute, USA)

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Abstract: This study uses administrative tax data to build a unique panel dataset that follows the 1945 birth-year cohort from 2000 (when aged 55) through 2017 (when aged 72). These data allow us to observe changes in the amount and composition of individuals’ income from before they are eligible to claim Social Security retirement benefits until after they are eligible for maximum Social Security benefits and generally must begin taking distributions from their IRAs and DC plans. We examine changes with age in the inflation-adjusted amount of total and spendable income, as well as changes in the composition of income as labor income declines and Social Security benefits and retirement income (IRA distributions and income from pensions and annuities) increase. We find that the typical individual maintained more than 90 percent of their age 55-59 spendable income—that is, the income available to spend after paying taxes and saving for retirement—through age 72. Those with lower age 55-59 income typically had higher spendable-income replacement rates. We find much higher incidence of retirement income than is typically reported in household survey data. By age 72, 75 percent received retirement income directly or through a spouse, with incidence higher than 80 percent for the top 60 percent of the age 55-59 income distribution. The median share of income from Social Security was 47 percent at age 72. Reflecting the design of the US Social Security system, those with lower age 55-59 income tended to rely more on Social Security benefits in retirement while those with higher age 55-59 income tended to rely more on retirement plan distributions.

Session 4: Wellbeing and Pension Investment Strategies

Material Well-Being in Retirement: The Roles of Preferences and Circumstances

Jason Seligman (Investment Company Institute, USA)

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Abstract: Retirement is not the end of a lifepath, but rather a milestone along the way. Building on Holden and Seligman 2023 we consider the varied journey of US households through retirement. We investigate potential determinants of improving and declining wealth decile-outcomes over time as a function of preferences: bequest intentions, Social Security claiming age, and planning horizons, and circumstances: age, estimated longevity, reported health, sense of well-being, level of tax advantaged retirement assets and initial wealth decile at late career ages. Each of these dimensions is available through our rich set of constructed longitudinal portfolio wealth measures and the full Health and Retirement Study (HRS) panel data. Our constructed data include RAND longitudinal panel HRS data, along with enhanced defined contribution pension data, and IRA balances constructed from RAND Fat Files over the 1992- 2020 period. Wealth measures for Social Security, tax advantaged retirement assets (i.e. defined benefit, annuity, defined contribution, and individual retirement account wealth), housing, and other wealth, enable tracking of household balance sheets through retirement. This allows us to measure both the absolute magnitude of resources as well as their composition, while controlling for preferences and circumstances—exactly what is needed to provide insight on the how’s and why’s of older households’ asset management, and their financial outcomes through retirement

The Impact of Mandatory Retirement Savings on Seniors’ Income Security

Amin Mawani (York University, Toronto, Canada)

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Abstract: There has been recent advocacy for raising the age at which Registered Retirement Savings Plans (RRSPs) must be converted to Registered Retirement Income Funds (RRIFs), and for reducing the annual minimum withdrawal rates from RRIFs or even eliminating the mandatory minimum RRIF withdrawals.
This article argues that mandatory RRIF withdrawals starting at age 71 may not be the threat to income security during retirement for most Canadian seniors. Forced RRIF withdrawals do not have to result in any significant forced dis-savings. Given the modest amounts accumulated in RRSPs and RRIFs by most Canadians, the amounts required to be withdrawn each year are likely necessary for consumption and not likely to be constrained by the rules on mandatory RRIF withdrawals. Basic tax planning strategies such as reinvesting RRIF withdrawals into Tax-free Savings Accounts (TFSAs) can further reduce the cost of mandatory RRIF withdrawals.
In the interest of simplicity and reducing compliance burden, this article also suggests that RRIF-holders with up to $200,000 of accumulated savings (equivalent to the 75th percentile of RRIF balances) be exempted from mandatory annual withdrawals.
From a tax policy perspective, indefinite deferral of larger retirement savings balances may allow wealthy Canadians to use such savings for estate planning purposes and would be a regressive measure. Furthermore, retaining wealth inside tax-deferred accounts while claiming Old Age Security (OAS) because of low income would jeopardize the sustainability of the OAS program. OAS was not designed to withstand eligibility from seniors who are asset-rich but reluctant to draw down on their retirement assets that were accumulated with tax-deferred savings.

Search Frictions, Investment Strategies, and Performance in Private Equity: Evidence from Pension Funds

Da Li (University of Wisconsin-Madison, USA)

Abstract: I analyze how search frictions distort pension fund private equity investments through a directed search framework. Adverse selection caused by asymmetric information is the main source of these frictions, resulting in inefficient market tightness, fund size, and equilibrium outcomes. Through a deep learning method, this research provides both theoretical and empirical insights into the evolving dynamics of alternative investment markets. It reveals that high search frictions cause pension funds to choose smaller funds and less competitive markets, which correlates with their underperformance. Pension funds increase private equity investments to manage return volatility, but this leads to lower returns. The findings also highlight the role of consultants in improving match outcomes in these markets, suggesting a significant impact of search frictions on investment efficiency and market equilibrium.