Attaching Income-For-Life 'Back-Ends' to DC Pension Plans: Why The Time Has Come

“….I would argue that mortality credits….that is, the money bequeathed to the pool by the deceased….should only be spent after it has been received…”. MOSHE MILEVSKY^I

Solving the ‘Annuity Puzzle’

The goal of our February Letter was to solve the ‘annuity puzzle’: why presumably rational retirees don’t buy immediate life annuities with their accumulated DC pension pots.ⁱⁱ The answer turns out to lie in how you ask the question. If you ask people if they want to invest their pot in a product where they could lose all their money should they die tomorrow, they naturally say ‘no’ (too risky!). In contrast, if you ask people if they want to invest their pot (or at least part of it) in a product that will pay them a pension as long as they live, they will likely not say ‘no’ but say ‘interesting….tell me more?’

Consequently, the February Letter argued, effective DC decumulation designs should have two distinct components: 1. An immediate investment component owned by the retiree, and 2. A deferred protection component that provides ‘income-for-life’ should the retiree outlive his/her life expectancy. 

This sequel Letter offers a progress report on the considerations involved in turning that two-component design conclusion into a broader, functional DC decumulation design. In short, it addresses the ‘tell me more?’ question retirees should logically ask. This Letter’s contents were inspired by a recent ‘longevity risk pooling’ workshop we organized at the request of Australian actuary David Knox, as part of his global quest to discover thought-leading thinking on solving the annuity puzzle as a practical matter.