Pensions and home ownership in the welfare mix for older persons

The paper draws on actuarial mathematics, examining the role of housing in the welfare mix for older persons. New concepts for asset-based welfare, where the housing owned by the occupant is part of the investment portfolio comprised of state pension, occupational defined contribution (private) pension and one's residential property, are examined. We present how the variance of pension income after retirement is reduced by using residential property as the 4th pillar of the pension system, as proposed in the EC Green Paper on Pensions (2010). The study is focusing on modelling the decumulation of the housing equity and the defined contribution private pension, incorporating insurance mechanisms for management of longevity. Here we propose a new model in which periodic payout that the beneficiary receives is the difference between the amount drawn and the annuity premium for longevity insurance. The paper shows how the drawing amount in the loan model ERS (reverse mortgage) is decreasing with the increasing interest rate, while the pension arising from defined contribution systems is increasing with the increasing interest rate. According to Markowitz's Portfolio Theory, these findings show that in combination of these products, the volatility of a combined pension cash flow from all pillars induced by volatile interest rates decreases, which improves the pension portfolio, i.e. where pensions from defined contribution systems exist.