Valuation and hedging of the ruin-contingent life annuity (RCLA)

This paper analyzes a novel type of mortality contingent-claim called a ruin-contingent life annuity (RCLA). This product fuses together a path-dependent equity put option with a "personal longevity" call option. The annuitant's (i.e. long position) payoff from a generic RCLA is \$1 of income per year for life, akin to a defined benefit pension, but deferred until a pre-specified financial diffusion process hits zero. We derive the PDE and relevant boundary conditions satisfied by the RCLA value (i.e. the hedging cost) assuming a complete market where No Arbitrage is possible. We then describe some efficient numerical techniques and provide estimates of a typical RCLA under a variety of realistic parameters. The motivation for studying the RCLA on a stand-alone basis is two-fold. First, it is implicitly embedded in approximately \$1 trillion worth of U.S. variable annuity (VA) policies; which have recently attracted scrutiny from financial analysts and regulators. Second, the U.S. administration - both Treasury and Department of Labor - have been encouraging Defined Contribution (401k) plans to offer stand-alone longevity insurance to participants, and we believe the RCLA would be an ideal and cost effective candidate for that job

Life Annuities Are Rarely Appreciated - Even by Financial Advisors

As you get closer to retirement, make sure you understand your options and the role annuities might play in your financial plan.York's Knowledge Mobilization Unit provides services and funding for faculty, graduate students, and community organizations seeking to maximize the impact of academic research and expertise on public policy, social programming, and professional practice. It is supported by SSHRC and CIHR grants, and by the Office of the Vice-President Research & Innovation. [email protected] www.researchimpact.c

Income drawdown schemes for a defined-contribution pension plan

In retirement a pensioner must often decide how much money to withdraw from a pension fund, how to invest the remaining funds, and whether to purchase an annuity. These decisions are addressed here by introducing a number of income drawdown schemes, which are relevant to a defined-contribution personal pension plan. The optimal asset allocation is defined so that it minimizes the expected loss of the pensioner as measured by the performance of the pension fund against a benchmark. Two benchmarks are considered: a risk-free investment and the price of an annuity. The fair-value income drawdown rate is defined so that the fund performance is a martingale under the objective measure. Annuitization is recommended if the expected fair-value drawdown rate falls below the annuity rate available at retirement. As an illustration, the annuitization age is calculated for a Gompertz mortality distribution function and a power law loss function