Nice post, never thought about combining DB and DC this way. Although, I was hoping to pick your brain on a few points.
Consumption gap - How would you address the consumption gap issue with annuities? That is, people spend more early into retirement while their still active, less in the middle and more later in life due to declining health. I guess the 4% rule doesn't address this either, but with annuities you're locked into whatever income you're given whereas with DC you have the flexibility to draw out more.
DB efficiencies - Wouldn't retail annuity providers already capture most of these pooling benefits? They're already running books of millions of policies so they could already benefit from group mortality rates and overhead scale. The real question is whether they're passing that on to customers or taking it as margin.
Also, wouldn't a DC/DB conversion face the same adverse selection problem as retail annuities? The people who opt in are likely to live longer and/or more financially literate than average, which makes the pool harder to price.
Rate dependency - I would think DB schemes look attractive right now because rates are decent but I would imagine it won't last forever. I read the UK had mandatory annuitization and it became deeply unpopular because annuity rates were terrible. It was eventually scrapped in 2015 for more flexibility. If rates go near zero again doesn't the whole value proposition fall apart again?
Hi Ernie,
Nice post, never thought about combining DB and DC this way. Although, I was hoping to pick your brain on a few points.
Consumption gap - How would you address the consumption gap issue with annuities? That is, people spend more early into retirement while their still active, less in the middle and more later in life due to declining health. I guess the 4% rule doesn't address this either, but with annuities you're locked into whatever income you're given whereas with DC you have the flexibility to draw out more.
DB efficiencies - Wouldn't retail annuity providers already capture most of these pooling benefits? They're already running books of millions of policies so they could already benefit from group mortality rates and overhead scale. The real question is whether they're passing that on to customers or taking it as margin.
Also, wouldn't a DC/DB conversion face the same adverse selection problem as retail annuities? The people who opt in are likely to live longer and/or more financially literate than average, which makes the pool harder to price.
Rate dependency - I would think DB schemes look attractive right now because rates are decent but I would imagine it won't last forever. I read the UK had mandatory annuitization and it became deeply unpopular because annuity rates were terrible. It was eventually scrapped in 2015 for more flexibility. If rates go near zero again doesn't the whole value proposition fall apart again?
Best,
Josh