On the study of Malaysia’s private annuity

Mortality improvement in many countries nowadays has drawn policymakers’ attention towards providing a financially stable retirement scheme for retirees. In some countries like Chile and Switzerland, annuities are common and a successful product with a good retirement benefit. Private annuities specifically designed for Employees Provident Fund members were also introduced in the Malaysian market in 2000. Despite the high annuitisation rate during that time, this product was suspended by the government a year after. Objections towards the scheme included a belief that insurance companies may profit excessively from the scheme and it provided a lack of protection for contributors’ retirement savings. Annuities have been almost non-existent since then. In a recent Malaysian Government Budget an increase in tax relief for income used to purchase annuities seems to promote the development of annuity markets in Malaysia. Until now, there has been a lack of proper analysis in Malaysia to help buyers understand the value of annuities, especially upon retirement. This study aims to calculate the value for money of Malaysia’s private annuities by computing the Money’s Worth Ratio (MWR) and the Annuity Equivalent Wealth (AEW) of the annuity component of recent products. This analysis will be used to evaluate whether Malaysian private annuities are worth buying

Excel implementation of finite difference methods for option pricing

This paper presents and explains finite difference methods for pricing options and shows how these methods may be implemented in Excel. We cover both the explicit and the implicit finite difference methods. Each uses a numerical approximation to the partial differential equation and boundary condition to convert the differential equation to a difference equation. The difference equation can be solved using Excel and this solution is a numerical approximation to the option price. This paper explains how we obtain the difference equation from the differential equation and shows the reader how to implement and solve the difference equation using Excel

Will the NDIS be sustainable?

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Book review : 'Are you a stock or a bond? Create your own pension plan for a secure financial future'

Book review of "Are You a Stock or a Bond? Create Your Own Pension Plan for a Secure Financial Future" by Moshe A. Milevsky. Financial Times Press, 2009, ISBN 9780137127375, 240 pages.3 page(s

Annuitisation and cross-subsidies in a two-tiered retirement saving system

We develop a generalisation of the World Bank (1994) model of forced saving for retirement. This broader model consists of two tiers of second pillar savings – mandated and non-mandated (voluntary). Furthermore, the government can set two types of guarantees on the first (mandated) tier – investment returns and annuity prices – leading to possible cross-subsidisation between the tiers. This has the potential to induce social redistribution, foster a liquid private market for life annuities, and obviate some of the investment risk and annuity price risk that retirees face. We formulate a quantitative model of financial flows within such a system, which explains the mechanism by which cross-subsidisation occurs. Based on this analysis, a taxonomy of two-tiered retirement systems is presented, that is based on the choices that the government makes.19 page(s

Explaining Low Annuity Demand: An Optimal Portfolio Application to Japan

Using an optimizing financial planning model in the tradition of Merton and Richard we explore how individuals should determine their life insurance and annuity choices, given uncertainty about investment returns and mortality. Both consumption and bequests appear as arguments in the individual's preference function. The model explicitly recognizes the existence of social security in retirement, and of loadings on insurance premiums, due to administration costs in the life insurance and annuities markets. The model sheds light on the reasons for the thinness of voluntary life annuity markets worldwide. The relative importance of pre-existing annuitization through social security, the role of bequests, and premium loadings are quantitatively assessed within a single optimizing framework. Results are presented for a model specification calibrated to Japan. Copyright (c) The Journal of Risk and Insurance, 2008.