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This paper sets out the working party’s view that for a defined benefit pension scheme’s commutation rate the appropriate starting point should be to set it in line with the scheme’s cash equivalent transfer value basis. We recognise that there may be several reasons why an actuary in their advice may deviate from that starting point and we explore these in detail, giving our views on when deviation is and is not justified, noting that many common reasons used such as selection risk are often used without (in our view) adequate justification. We also cover frequency of review – our view is that commutation rates should be reviewed at least every 3 years and actuaries should consider performing a high-level review of commutation rates annually. We suggest that actuaries should consider proposing market-related commutation rates especially in periods of volatile market conditions. In terms of timing, there are good arguments to review commutation terms either following or during a valuation. Finally, we set out some considerations on how actuaries should present their advice, such as clearly setting out all the information required to take key decisions, following up with any actuarial certification in writing (if necessary) and illustrating the impact on members for changing commutation rates.

Various decision contexts require the calculation of smaller recurring changes accumulated over time and their comparison to larger one-time changes (e.g., $100 periodic increase in monthly rent every year vs. a $1000 increase in rent at the end of 5 years). In both hypothetical and incentivized studies, we demonstrate an inaccuracy of estimations involving total cumulations of smaller recurring changes and single lump sums. We document this effect when individuals process increasing or decreasing changes in gains or losses (e.g., raises in wages or rent, discounts in membership fees). Importantly, these biases occur even when the changes are provided to the consumers as clear absolute dollar values as opposed to complex percentages. We discuss the theoretical contributions of our study as well as its implications for consumers, managers, and policy makers.

Research on choice architecture is shaping policy around the world, touching on areas ranging from retirement economics to environmental issues. Recently, researchers and policy makers have begun paying more attention not just to choice architecture but also to information architecture, or the format in which information is presented to people. In this article, the authors investigate information architecture as it applies to consumption in retirement. Specifically, in three experiments, they examine how people react to lump sums versus equivalent streams of monthly income. Their primary question of interest is whether people exhibit more or less sensitivity to changes in retirement wealth expressed as lump sums (e.g., $100,000) or monthly equivalents (e.g., $500 per month for life). They also test whether people exhibit an \"illusion of wealth,\" by which lump sums seem more adequate than monthly amounts in certain conditions, as well as the opposite effect, in which lump sums seem less adequate. They conclude by discussing how format-dependent perceptions of wealth can affect policy and consumers' financial decision making.

I study the optimal taxation oflabor and capital in a dynamic economy subject to government expenditure and technology shocks. Unlike representative-agent Ramsey models, workers are heterogenous and lump-sum taxation is not ruled out. I consider two tax scenarios: (a) linear taxation, with a lump-sum intercept and (b) nonlinear-Mirrleesian taxation. When taxes are linear, I derive a partial-equivalence result with Ramsey settings that provides a reinterpretation of such analyses. I find conditions for perfect tax smoothing oflabor-income taxes and zero capital taxation. Implications that contrast with Ramsey are derived for public-debt management, for the nature of the time-inconsistency problem and for the viability of replicating complete markets without state-contingent bonds. Shifts in the distribution of skills provide a novel source for variations in tax rates. For the nonlinear tax scenario, I show that taxation based on income averages is optimal.

For years, plan sponsors of defined benefit plans have been undertaking various strategies to align the plan benefits due with the plan assets, so-called de-risking opportunities. One popular strategy is to temporarily offer a lump sum distribution to participants, which removes the ongoing liability from the plan. This is commonly referred to as a \"lump sum window.\" Here, Dold discusses this popular de-risking option, but warns that administratively it can be complex and will require a proper drafting of a plan amendment, participation communications, and election materials.

Because life annuities can increase the level and decrease the volatility of lifetime consumption, economists have long been puzzled by the low demand for life annuities. One potential rational explanation is that adverse selection drives up life annuity prices, which drives down demand. We study the choice between life annuities and lump sums made by 32,000 retiring public employees. These unique data allow us to extend the existing literature by exploiting economically significant cross-sectional and time-series variation in life annuity pricing. We find little evidence that retiree demand for life annuities rises when life annuity prices fall. We find strong evidence that demand responds to salient variation in individual characteristics, such as health, and to measures of investor sentiment, such as recent equity returns.

Purpose The literature has demonstrated that lump-sum (LS) outperforms dollar-cost averaging (DCA) in uptrend markets while DCA outperforms LS only when the asset price is mean-reverted or downtrend. To bridge the gap in the literature, this study aims to use both Sharpe ratio (SR) and economic performance measure (EPM) to compare the performance of DCA and LS under both accumulative and disaccumulative approaches when the asset price is simulated to be uptrend. Design/methodology/approach This study uses both disaccumulative and accumulative approaches to compare DCA with LS and uses both SR and EPM to evaluate their performance when the asset price is simulated to be uptrend. Instead of using the annualized returns that are commonly used by other DCA studies, we compute the holding-period returns in the comparison in this paper. Findings The simulation shows that no matter which approach is used, DCA outperforms LS in nearly all the cases in the less uptrend markets while DCA still performs better than LS in many cases of the uptrend markets, especially when the market is more volatile and investment horizon is long, regardless which approach the authors used. The authors also find more evidence supporting DCA over LS by using EPM, which is more suitable in the analysis because the returns generated by DCA are positive skewed and flat-tailed that are ignored when SR is used. Research limitations/implications The authors conclude that DCA is a better trading strategy than LS for investment even in the uptrend market, especially on high risky assets. Practical implications Investors could consider choosing DCA instead of LS as their trading strategy, especially when they prefer long term investment and investing in high-risk assets. Social implications Fund managers could consider recommending DCA to their customers, especially when they prefer long term investment and investing in high-risk assets. Originality/value This is the own study and, as far as the authors know, this is the first study in the literature uses both SR and EPM to compare the performance of DCA and LS under both accumulative and disaccumulative approaches when the asset price is simulated to be uptrend.

We develop a household model wherein farmers allocate labor to maximize utility from leisure, consumption, and nonpecuniary benefits from farming. The model shows that farmers with decreasing marginal utility of income respond to higher decoupled payments by decreasing off-farm labor and increasing farm labor, resulting in greater agricultural output. We then estimate the difference between farm and off-farm returns to labor using data from three nationally representative farm household surveys. The finding of a large on-farm/off-farm wage differential provides compelling evidence of substantial nonpecuniary benefits from farming.

The military draw down program of the early 1990's provides an opportunity to obtain estimates of personal discount rates based on large numbers of people making real choices involving large sums. The program offered over 65,000 separatees the choice between an annuity and a lump-sum payment. Despite break-even discount rates exceeding 17 percent, most of the separatees selected the lump sum-saving taxpayers $1.7 billion in separation costs. Estimates of discount rates range from 0 to over 30 percent and vary with education, age, race, sex, number of dependents, ability test score, and the size of payment.

We consider the optimal financing (capital injections) and dividend payment problem for a Brownian motion model in the case of restricted dividend rates. The company has no obligation to inject capitals and therefore, the bankruptcy risk is present. Capital injections, if any, will incur both fixed and proportional transaction costs and dividend payments incur proportional transaction costs. The aim is to find the optimal strategy to maximize the expected present value of dividend payments minus the total cost of capital injections up to the time of bankruptcy. The problem is formulated as a mixed impulse-regular control problem. We address the problem via studying three cases of two auxiliary functions. We derive important analytical properties of the auxiliary functions and use them to study the value function and then identify the optimal control strategy. We show that the optimal dividend control is of threshold type and the optimal financing strategy prescribes to either never inject capitals or inject capitals only when the surplus reaches 0 with a fixed lump sum amount.