Understanding Heterogeneity in Lifetime Pension Pools: Implications for Practice

Overview

The research examines how heterogeneity within lifetime pension pools affects the stability of retirement income. The analysis shows that pool composition matters at least as much as pool size. The results highlight a fundamental asymmetry across sources of heterogeneity. Mortality heterogeneity can be either stabilizing or destabilizing depending on how it enters the pool.

Key Findings

The report examines how heterogeneity within lifetime pension pools affects benefit stability, with a particular focus on mortality and initial benefit level differences across groups.

Several clear conclusions emerged from the analysis. First, heterogeneity in mortality risk can either enhance or undermine stability depending on how it is introduced. Second, heterogeneity in the amount of funds brought to the pool at inception is destabilizing. Third, when multiple dimensions of heterogeneity interact, stability outcomes depend on their joint configuration. Younger members can sustain higher benefits without undermining stability, whereas older members improve stability only when their benefits are lower.

Acknowledgements

The authors’ deepest gratitude goes to those without whose efforts this project could not have come to fruition: the volunteers who generously shared their wisdom, insights, advice, guidance, and arm’s-length review of this study prior to publication. Any opinions expressed may not reflect their opinions nor those of their employers. Any errors belong to the authors alone.

Project Oversight Group members:

Gavin S. Benjamin, FSA, FCIA
David R. Cantor, ASA, EA, CFA, FRM
Douglas P. Chandler, FSA, FCIA
Seungjae Lee, ASA, MAAA
Grant T. Martin, FSA, EA, CERA, FCA
Lawrence I. Pollack, FSA, MAAA, FCA
Mark Shemtob, FSA, MAAA, EA, MSPA, FCA

At the Society of Actuaries Research Institute:

Barbara Scott, Senior Research Administrator
Steven C. Siegel, ASA, MAAA, SOA Senior Practice Research Actuary