Granting Exit Option to the Insureds of the Iran Social Security Organization’s (ISSO) Pension Fund and its Impact on the Fund’s Sustainability

Author
Abbas khandan
Kharazmi University
Abstract
Collective pension funds have many advantages including larger risk pool and the possibility of interpersonal and intergenerational risk sharing, as well as economies of scale and lower administrative costs. For decades, however, this has been achieved through mandatory participation, while this traditional and mandatory form of contribution is no longer commensurate with the future of work. In this regard, many countries have implemented a combinatorial policy in the form of auto-enrolment pensions and then the granting of opting out authority. However, the sustainability of these schemes will depend on people's motivation to participate or leave. This article tries to examine the motivations of individuals to exit the Iran Social Security Organization (ISSO) pension fund, assuming that the insureds are given the opportunity to opt out once in a certain time. For this purpose, the method of option pricing is used. Findings show that insureds will accept even a 60 percent deficit in fund’s long-term liabilities for the only reason to take advantage of investment income of their predecessors funds or interpersonal and intergenerational risk sharing. It was also observed that an increase in the funding ratio, lower liabilities, a rise in assets and a higher rate of return on investments encourage participation and reduce the incentive to exit. A decline in accrual rate, increase in the contribution rate, higher retirement age, accelerating the adjustment rate of fund deficit due to their detrimental effect on the insureds have a direct negative effect on the incentive to participate and stimulate withdrawal. It should be noted, however, that these factors will also reduce liabilities and increase the funding ratio, thereby contributing to the sustainability of the plan may ultimately reduce the exit incentives.
Keywords
Exit option
Iran Social Security Organization’s (ISSO) pension fund
Sustainability
European option
Beetsma, R.M.W.J., Romp, W.E., & Vos, S.J. (2012). Voluntary participation and intergenerational risk sharing in a funded pension system. European Economic Review. 56(6), 1310–1324.
Bernard, C., & Lemieux, C. (2008). Fast simulation of equity-linked life insurance contracts with a surrender option. Proceedings of 2008 Winter Simulation Conference.
Boon, L.N., Brière, M., & Werker, B.J.M. (2020). Systematic longevity risk: to bear or to insure? Journal of Pension Economics & Finance. 19(3), 409-441.
Cathcart, M., & Morrison, S. (2009). Variable annuity economic capital: the leastsquares Monte Carlo approach. Life & Pensions. 44–48.
Chen, D.H.J. (2015). Voluntary participation in a defined benefit pension scheme: An option pricing approach. Discussion Paper 11/2015-042, Netspar, Tilburg. Retrieved from https://www.netspar.nl/en/publication/voluntary-participation-in-a-defined-benefit-pension-scheme-an-option-pricing-approach/
Chen, D.H.J., Beetsma, R.M.W.J, Broeders, D.W.G.A, & Pelsser, A.A.J. (2017). Sustainability of participation in collective pension schemes: An option pricing approach. Insurance: Mathematics & Economics. 74, 182-196.
Chen, A., & Uzelac, F. (2015). Portability, Salary and Asset Price Risk: A Continuous-Time Expected Utility Comparison of DB and DC Pension Plans. Risks. 3(1), 77-102.
Molenaar, R., Peijnenburg, J., & Ponds, E. (2011). Should I stay or should I go? break even funding ratios for DB pension plan participants. Discussion Paper 04/2011-027, Netspar. Tilburg. Retrieved from https://research.tilburguniversity.edu/en/publications/should-i-stay-or-should-i-go-break-even-funding-ratios-for-db-pen
Romp W., & Beetsma R.M.W.J. (2020). Sustainability of pension systems with voluntary participation. Insurance: Mathematics and Economics. 93, 125-140.
Siegmann, A. (2011). Minimum funding ratios for defined-benefit pension funds. Journal of Pension Economics & Finance. 10 (3), 417–434.
Sullivan, M. (2019). Auto-enrolment grows globally. IPE Magazine. Retrieved from https://www.ipe.com/auto-enrolment-grows-globally/10029254.article