CIM PROGRAMS AND ACTIVITIES

IFID Conference on Retirement Income Analytics to be held at Fields Institute, 222 College Street, Toronto November 25, 2009
Scientific Committee Narat Charupat (McMaster University), David Promislow (York University), Moshe Milevsky (York University)

Audio and Slides of talks

Overview

Prominent researchers, in the general area of “retirement income analytics” will be invited to speak.The IFID Centre’s "best paper award" will also be given at the conference.

Schedule:

Wednesday, November 25, 2009
8:30-8:55	REGISTRATION & BUFFET BREAKFAST
8:55-9:00	OPENING REMARKS Prof. Edward Bierstone, University of Toronto & Director, Fields Institute Prof. Moshe A. Milevsky, Schulich School of Business, York University
9:00-10:15	KEYNOTE ADDRESS #1, PLUS Q&A Professor Eytan Sheshinski, Hebrew University & Princeton University Recent Innovations in Annuities
10:15-10:30	COFFEE BREAK
10:30-11:45	KEYNOTE ADDRESS #2, PLUS Q&A Professor Michael Sheris, University of New South Wales Securitization, Structuring and Pricing of Longevity Risk
11:45-12:30	BUFFET LUNCH & NETWORKING OPPORTUNITY
12:30-1:15	RESEARCH SEMINAR Professor Nabil Tahani, York University Targeting Retirement Odds: Better Approximations with Higher Sustainability
1:15-2:30	PH.D. AWARD WINNERS (30 MINUTE PRESENTATIONS) Luis Goncalves-Pinto, USC Marshall School of Business How Does Illiquidity Affect Delegated Portfolio Choice? Kim Peijnenburg, Tilburg University Optimal Annuitization with Background Risk and Equity Exposure During Retirement
2:30	CLOSING REMARKS

List of Speakers:

Keynote Lecture #1, Prof. Eytan Sheshinski, Hebrew University
Keynote Lecture #2, Prof. Michael Sherris, University of New South Wales

Research Presentation #1, Prof. Nabil Tahani, York University

Abstracts:

Prof. Michael Sherris, University of New South Wales
Securitization, Structuring and Pricing of Longevity Risk

Pricing and risk management for longevity risk has increasingly become a major challenge for life insurers and pension funds around the world. Risk transfer to financial markets, with their major capacity for efficient risk pooling, is an area of significant development for a successful longevity product market. The structuring and pricing of longevity risk using modern securitization methods, common in financial markets, has yet to be successfully implemented for longevity risk management. There are many issues that remain unresolved in order to ensure the successful development of a longevity risk market. This paper considers the securitization of longevity risk focusing on the structuring and pricing of a longevity bond using techniques developed in the financial markets, particularly for mortgages and credit risk. A model based on Australian mortality data and calibrated to insurance risk linked market data is used to assess the structure and market consistent pricing of a longevity bond. Age dependence in the securitized risks is shown to be a critical factor in structuring and pricing longevity linked securitizations.
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Prof. Eytan Sheshinski, Hebrew University and Princeton University
Recent Innovations in Annuities

I shall focus my remarks on two explanations of the so-called "Annuity Puzzle" and propose the creation of new financial instruments that will make income annuities more attractive. (1.) The Illiquidity of income annuities due to the lack of residual (or secondary) markets is a major reason for the reluctance to purchase annuities. I will propose a new type of "Guaranteed Annuities", equivalent to annuity options, which enable resale at predetermined prices. (2.) Out of pocket health expenditures are increasingly a problem for the elderly. We propose a new type of "Life Care Annuities" which have flexible rules to convert retirement benefits to cover medical expenses when needed. I shall also identify the self-selection of individuals who purchase annuities with a bequest option and those who purchase regular annuities, making the connection to life insurance.
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Prof. Nabil Tahani, York University
Targeting Retirement Odds: Better Approximations with Higher Sustainability

This talk will consist of two parts. The first part discusses and then extends the literature on the sustainability of retirement income by making consumption a stochastic variable instead of a constant real value, as previous papers have done. Using different lifestyle scenarios, I will show that the difference in shortfall probabilities (a.k.a. risk of ruin) between the variable cases and the fixed consumption case is significant. In general, an initial consumption (or spending rate) of more than 4% of initial wealth is not sustainable for any likely set of conditions. In the very best case, an initial consumption rate of 6% is sustainable, but this case will fit very few people. The second part of the talk deals with the classic pre-retirement problem in which a client is advised on how much to save each year to reach a specified goal and how the investment assets should be allocated between fixed income and equity. I will derive a stochastic model in which the rate of return and the rate of increase of annual savings are both variable and calculate the probability that a particular goal will be achieved. I will illustrate the use and provide some numerical results of the model with a realistic retirement planning scenario and variations.

Ph.D. Student Paper Award Winners:

Luis Goncalves-Pinto
PhD Candidate in Finance
USC Marshall School of Business
Title: How Does Illiquidity Affect Delegated Portfolio Choice?
Abstract:
In a continuous-time dynamic portfolio choice framework, I study the problem of an investor who exogenously decides to delegate the administration of her savings to a risk-averse money manager who trades multiple risky assets in a thin market. I consider a manager who is rewarded for increasing the value of assets under management, which is the product of both the manager's portfolio allocation decisions, taken over the investment period, and the money flows into and out of the fund, as a result of the portfolio performance relative to an exogenous benchmark. The model proposed here shows that, whenever the manager can substitute between more illiquid and less illiquid risky assets, she is likely to choose to hold an initial portfolio that is skewed toward more illiquid assets, and to gradually shift toward less illiquid assets over the investment period. The model further shows that, several misalignments of objectives between the investor and the manager can lead to large utility costs on the part of the investor, and that these costs decrease with asset illiquidity. Solving for the shadow costs of illiquidity, the model indicates that delegated rather than direct investing is likely to lead to larger price discounts.
Full paper available here

Kim Peijnenburg
Doctoral candidate
Department of Econometrics and Operations Research
Tilburg University
Title: Optimal Annuitization with Background Risk and Equity Exposure During Retirement
Abstract:
We examine optimal annuity demand and incorporate background risk and incomplete annuity menus as possible drivers of deviations from full annuitization. Contrary to what is often suggested in the literature, we find that in these settings full annuitization remains close to optimal. Whenever liquidity or equity exposure is desired, individuals save sizeable amounts out of their annuity income to smooth shocks due to background or inflation risk and/or to get equity exposure. Similarly, adding variable annuities to the menu does not increase welfare significantly, since individuals can save in order to get the desired equity exposure.
Full paper available here

 

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