Optimal features of micropension schemes
15-Feb-2010 This research paper, written by Nadiya Ivanova for the completion of her study Econometrics at the Erasmus University of Rotterdam, analyses elements of the traditional pension scheme in order to select optimal settings for micro pensions.
The goal of this thesis research is to investigate the elements of the regular pension scheme and select or modify those that are the most beneficial for the underprivileged people as a client group. Both the Expected Utility framework and Cumulative Prospect Theory are used to evaluate the theoretical benefits versus the observed behavior. One of the conclusions of this research paper is that annuity is an optimal choice as an insurance against longevity, except for the cases of confirmed terminal illness. Loss aversion in CPT explains the choice against annuitization that people often make in the real life.
The topic arose in the context of the project for Indian rural poor, which the Pension & Development Network is together with the DHAN Foundation currently planning to implement. The goal of the project is to create a sustainable pension scheme involving people with the lowest income with the coverage 25.000 people after the period of five years.