Nonfinancial defined contribution pension schemes: is a survivor dividend necessary to make the system balanced?

Abstract

The survivor dividend, at a specific age, is the portion of participants’ credited account balances that is distributed on a birth cohort basis from the account balances of participants who do not survive to retirement. This article develops a model to show whether it would be justified to include the survivor dividend in the calculation of affiliate pension balances. The main findings are that the survivor dividend has a strong financial basis which enables the macro contribution rate applied to be the same as the individual credited rate, and that including the survivor dividend in the calculation of the initial pension is not irrelevant because the initial pension could rise by up to 21.84%, depending on the mortality scenario used.

Keywords:

• financial equilibrium
• longevity risk
• pay-as-you-go
• public pensions
• retirement
• transparency

JEL Classification:

• H55
• J26

Funding

The authors are grateful for the financial assistance received from the Spanish Ministry of Education and Science (project ECO2009-13616) and the Spanish Ministry of the Economy and Competitiveness (project ECO2012-36685).

Notes

¹ However, the papers cited do not explicitly consider the effect of the survivor dividend on the equilibrium of NDC schemes.

² The same assumption is applied by Pensionsmyndigheten (2013).

³ In the case where k is 1, the subscript 1 can be omitted.

⁴ Only observed mortality rates are used and not the population structure by ages.

⁵ Years with the latest information available according to the Human Mortality Database (http://www.mortality.org/). Date accessed 10 May 2013.

⁶ The replacement rates are high in our example due to the fact that individuals work nonstop for 49 years.