Improving Money’s Worth Ratio Calculations: The Case of Singapore’s Pension Annuities

Joelle H. Fong, Jean Lemaire and Yiu K. Tse

Abstract

This paper contributes to a better understanding of the risks involved in a life annuity investment. We study the full distribution of weighted annuity benefits and quantify risk measures such as dispersion and skewness, thereby extending the usefulness of the popular money’s worth valuation framework for life annuities. Using data from pension annuities in Singapore, we also introduce several risk measures that might appeal to less financially sophisticated retirees. A more detailed and accurate picture of the risk of investing in life annuities emerges, enabling prospective annuitants to differentiate among products that may appear seemingly uniform in terms of money’s worth, but vary widely in terms of their risk attributes.

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The Asia-Pacific Journal of Risk and Insurance ( APJRI) focuses on risk management and insurance issues of importance to the Asia-Pacific region. An interdisciplinary publication, APJRI facilitates the exchange of research in risk and insurance mathematics, economics, finance, and corporate practice. The journal welcomes theoretical and applied research papers on a variety of specific topics.

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