Differential longevity, fairness, and redistribution in NDC pension schemes: The case of the Italian annuity divisor

In Notional Defined Contribution (NDC) pension schemes, the annuity divisor plays a pivotal role in ensuring actuarial fairness and financial sustainability. However, depending on how it incorporates factors such as longevity improvements, gender, frontloading, indexation, marital status, and survivor benefits, the annuity divisor can generate significant redistributive effects both across individuals and between generations. This paper examines the actuarial fairness and redistributive properties of the uniquely designed Italian NDC annuity divisor. Specifically, it analyses the implications of: using period rather than cohort annuity divisors; the sex gradient in longevity; the inclusion of survivor pensions through one-head, gender-specific reversionary annuity factors undifferentiated by marital status; the frontloading of pension payments; and other demographic and economic institutional parameters. The study adopts a prospective analytical framework to generate forecasts of period and cohort unisex and gender-specific annuity divisors and annuity rates up to the year 2100, employing a Bayesian model combination of stochastic mortality models. The findings confirm that the Italian annuity divisor design entails non-negligible distributional and financial sustainability effects, leading to systematic redistribution both within and between generations. The direction and magnitude of the resulting implicit tax/subsidy effects vary by sex, retirement age, and time. These outcomes are critically influenced by the use of a period approach, the frontloading of pension benefits while maintaining price indexation, and the inclusion of survivor pensions in the divisor formula. Ultimately, the Italian annuity divisor design results in implicit cross-subsidisation from single individuals to married couples and may introduce incentive distortions that affect both labour supply and retirement decisions.