A Utility-Based Comparison of Pension Funds and Life Insurance Companies under Regulatory Constraints

This paper compares two different types of annuity providers, i.e. defined benefit pension funds and life insurance companies. One of the key differences is that the residual risk in pension funds is collectively borne by the beneficiaries and the sponsor's shareholders while in the case of life insurers, it is borne by the external shareholders. This paper employs a contingent claim approach to evaluate the risk return trade-off for annuitants. For that, we take into account the differences in contract specifications and in regulatory regimes. Mean-variance-skewness analysis is conducted to determine annuity choices of consumers. We calibrate the regulatory default probabilities such that the consumer is indifferent between a pension fund and a life insurer. The consumer's risk aversion level appears to play a crucial rule in this