The survivor dividend as a tool to improve pension adequacy in nonfinancial defined contribution schemes

The mechanisms of non-financial defined contribution pension schemes (NDCs) are close to those of a fully funded defined contribution plan but under a pay-as-you-go framework. Of particular interest is how the accumulated capital of a deceased person is used, when the death occurs prior to retirement. At the moment, Sweden is the only NDC country that distributes this capital, called survivor dividend (SD). Without a distribution of the SD, the scheme would accumulate a reserve with no clear purpose. This paper aims to analyse to what extent the SD kept by most NDCs can be used to improve pension adequacy giving low-income pensioners the financial support they need. We develop theoretical models to achieve the financial equilibrium of the scheme depending on how the SD is distributed among all socio-economic groups and the use of different mortality tables (unisex versus group-specific). Our results indicate that the survivor dividend can be used to set up a minimum pension that benefit 66.54% of the pensioners increasing the average annual pension by 8.68%.