Exchanging uncertain mortality for a cost

We analyze a pooled annuity fund from a participant's perspective by comparing it to a mortality-linked fund, a type of variable payout life annuity, that gives a return linked to the force of mortality but subject to a cost. Fixing the instantaneous volatility of return on wealth, we find that the expected return on the pooled annuity fund is higher except when the costs are very low in the mortality-linked fund. Similar results are obtained when maximizing the expected lifetime utility of consumption, assuming a constant relative risk aversion utility function. In both settings, our results indicate that a participant may be willing to accept the mortality risk of the pooled annuity fund, even when only 100 individuals are pooling their mortality in the pooled annuity fund. (c) 2012 Elsevier B.V. All rights reserved.