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Speaker(s): Ruud Smits (Aegon)
(risk-bearing investments in the payout phase: method and consequences)
This presentation discusses methods to pay out the accumulated capital in DC pensions, ranging from lump sum payments to guaranteed lifelong benefits that compensate for inflation. The emphasis is on modern techniques whereby risk-bearing investments increase benefits significantly while still providing lifelong pension payments. It touches upon the influence these payout methods have on the asset mix both during the accumulation phase and the payout phase.
Individual DC schemes can be moulded into many different shapes. Both popularity and variety of the versions that are offered in any specific country depend to a great degree on local legislation. Interest rate risk is looked at very differently when partial of even entire payout of the accumulated capital at the pension age is permitted as compared to a situation where the capital must be used to guarantee a lifelong fixed-amount monthly benefit. Legislation also influences whether remaining capital at the date the participant deceases is inherited by surviving dependents, or used to compensate for participants that live longer than average.
In the current low-interest environment, several DC and DB approaches result in a low pension benefit relative to the contributions that were paid by the participant and/or his employer during the accumulation phase. In the Netherlands legislation for DC schemes has changed recently and now include the possibility of abandoning the real guarantee of a lifelong fixed amount of monthly benefits. The accumulated capital still needs to be used to ensure benefits can be paid until the participant deceases, but monthly benefits may vary depending on realized investment returns.
A method to combine risk-bearing investments in the payout phase with lifelong pension benefits will be discussed in detail.