The Move towards Riskier Pensions: The Importance of Mortality

Anne G. Balter*, Malene Kallestrup-Lamb, Jesper Rangvid

*Corresponding author for this work

Research output: Working paperResearch


This paper models the impact of unanticipated changes in forecasted life expectancies on guaranteed and unguaranteed pension products. We study a unique data set containing individuals offered the opportunity to substitute a guaranteed pension product with relatively low levels of risk to an unguaranteed product with a higher degree of financial and longevity risk. The complexity of the products and the increase in the level of financial literacy required by the individual to make such a decision motivate the need to properly model the most important drivers that characterize the differences between guaranteed and unguaranteed pension products. This is done within the standard Merton, Black and Scholes framework and we find a clear tradeoff between financial risk and longevity risk in terms of their effect on future pension payments. We find that unguaranteed pension products allow for more financial risk-taking and thus higher expected returns. However, unexpected longevity shocks can reduce pension payments in unguaranteed pension products to a lower level relative to guaranteed products.
Original languageEnglish
Place of PublicationAarhus
PublisherAarhus Universitet
Number of pages31
Publication statusPublished - 2019
SeriesCreates Research Paper


  • Macro longevity risk
  • Variable annuities
  • Guarantee
  • Unguarantee

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