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One size fits all? Drawdown structures in Australia and The Netherlands

Couple examining pension options

Jennifer Alonso-Garcia and Michael Sherris.

Australia and the Netherlands both combine an unfunded non-contributory at rate pension with prefunded earnings related retirement schemes. Notwithstanding this similarity ofstructure, however, the two systems are very dierent. The Netherlands mandates annuitized drawdown structures. In Australia, no prescription, or even guidance, is oered. In both cases, products that better meet the needs of increasingly heterogeneous retirement cohorts are under consideration. We analyze the impact of various popular product choices in the Netherlands and in Australia on the welfare of individuals allowing for dierent income levels.

The study assumes the market return and mortality are stochastic and includes the impact of mean-testing, which reduces the value of the rst pillar at rate. Products oering longevity insurance are the most preferred in the absence of bequest, whereas more exible portfolioswith phased withdrawals score higher when individuals have a bequest motive. The state pension replaces the need to purchase indexed annuities for low income individuals whereas it does not crowd out the demand for longevity insurance for median and high income quantiles. We conclude that the income category, bequests, state pension and risk aversion have to be allowed for in any sound welfare assessment of retirement income portfolios since these affect the ranking of portfolios more sharply than mortality dierentials, loadings or timing of the purchase.
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