Payout Phase of Defined Contribution Systems: the Case of Slovakia

Abstract

The paper aims to assess various aspects concerning the payment phase of the old-age pension scheme, the socalled second pillar of the pension system in Slovakia. However, the conclusions may also be useful for other pension systems. Using the Lee-Carter model and standard actuarial methods, we conclude that the second pillar is advantageous for the high-income groups or in case of high performance of pension funds. We also address the issue of deferring the purchase of a lifetime annuity. Deferral can be beneficial when the yield of the pension fund exceeds a certain threshold value. This threshold usually raises with increasing age. We argue that the temporary pension is a disadvantageous product and its recent cancellation is correct. The main contribution of the paper subsists in a three-state model of long-term care insurance, using which we calculate corresponding replacement rates. Combined with a lifetime annuity, long-term care insurance can be beneficial.