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TARGET VOLATILITY STRATEGIES FOR GROUP SELF-ANNUITY PORTFOLIOS

Published online by Cambridge University Press:  11 April 2022

Annamaria Olivieri ,
Samuel Thirurajah  and
Jonathan Ziveyi Open the ORCID record for Jonathan Ziveyi [Opens in a new window]
Annamaria Olivieri
Affiliation:
Department of Economics and Management University of Parma Parma, Italy E-Mail: annamaria.olivieri@unipr.it
Samuel Thirurajah
Affiliation:
TAL, Sydney, Australia E-Mail: harrith97@hotmail.com
Jonathan Ziveyi*
Affiliation:
School of Risk and Actuarial Studies CEPAR, UNSW Sydney, NSW 2052, Australia
*
E-Mail: j.ziveyi@unsw.edu.au
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Abstract

While the current pandemic is causing mortality shocks globally, the management of longevity risk remains a major challenge for both individuals and institutions. It is high time there be private market solutions designed for efficient longevity risk transfer among various stakeholders such as individuals, pension funds and annuity providers. From individuals’ point of view, appealing features of post-retirement solutions include stable and satisfactory benefit levels, flexibility, meeting bequest preferences and low fees. This paper proposes a dynamic target volatility strategy for group self-annuitization (GSA) schemes aimed at enhancing living benefits for pool participants. More specifically, we suggest investing GSA funds in a portfolio consisting of equity and cash, continuously rebalanced to maintain a target volatility level. The performance of a dynamic target volatility strategy is assessed against the static case which does not involve portfolio rebalancing. Benefit profiles are assessed by analysing quantiles and alternative strategies involving varying equity compositions. The case of death benefits is included, and the fund dynamics analysed by assessing resulting investment returns and the mortality credits. Overall, higher living benefit profiles are obtained under a dynamic target volatility strategy. From the analysis performed, a trade-off between the equity proportion and the impact on the lower quantile of the living benefit amount emerges, suggesting an optimal proportion of equity composition.

Keywords

Group self-annuitizationlongevity-linked annuity benefitsinvestment-linked annuity benefitsmortality creditstarget volatility strategyexponentially weighted moving averageHeston stochastic volatility modelG22
Type
Research Article
Information
ASTIN Bulletin: The Journal of the IAA , Volume 52 , Issue 2 , May 2022 , pp. 591 - 617
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of The International Actuarial Association

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