Payout Phase for Fully-Funded Pension Schemes: An Alternative Approach to Risk Distribution

Luis Caro, Colombie

The payout phase of fully-funded pension schemes relies on the existence of annuity market and an insurance that can support it. This is no t the case when these schemes result from pension reforms in less developed countries. In these situations, in general, the annuity market is going to develop from the pension reform itself. Therefore, the industry has to deal with three delicate issues: first, the low initial base that is the starting point; second, lack of reliable mortality data; and third, underdeveloped capital markets. If these issues are not clearly understood and factored into the methodologies for determining reserves and capital requirements, it is very possible that in the long run the insurance industry will not be able to respond to the expectations. This would be a major drawback, with difficult to measure costs. This work proposes an alternative scheme of risk distribution. The idea is to keep the insurance industry’s exposure to risk in line with their current Capital Requirements. The excess risk is shifted to the annuitants, under a methodology in which they are rewarded consistently with the risk they bear.
Date: 30 May - Time: 8:30 to 10:00 - Room: 243
Theme: 1.B. Solvency measurements and asset-liability management