Fairness and annuity divisors for notional defined contribution pension schemes

Abstract

Abstract The use of a gender-neutral annuity divisor introduces an intra-generational redistribution from short-lived towards long-lived individuals; this entails a transfer of wealth from males to females and from low socioeconomic groups to high socioeconomic groups. With some subpopulations consisting of females from low socioeconomic groups (or males from high groups), the net effect of the redistribution is unclear. The study aims to quantify the lifetime income redistribution of a generic NDC system using two types of divisor – the demographic and the economic – to compute the amount of an initial pension. With this in mind, the redistribution (actuarial fairness) among subpopulations is assessed through the ratio between the present value of expected pensions received and contributions paid. We find that all subgroups of women and men with high educational attainment benefit from the use of the unisex demographic divisor. This paper also shows that the value of the economic divisor depends markedly on population composition. When mortality differentials by gender and level of education are considered, economic divisors are mostly driven by the longevity effect corresponding to gender.