Hedging mortality risk over the life-cycle—The role of information and borrowing constraints

Many pension schemes offer annuities pooling mortality risk across members. Such pooling has been criticized for having a regressive bias benefitting risk classes with the longest expected longevity. However, knowledge on mortality risk unfolds over the life-course, and it is optimal for risk averse households to annuitize all old-age consumption already as young buying pooled contracts, even if fair annuities are available later in life or risk class is private information. Borrowing constraints impair such frontloading but are lessened by a mandated pooled annuity targeting the middle-aged, improving welfare for all risk classes and the first-best allocation may be implementable.