Annuity Markets in Comparative Perspective : Do Consumers Get Their Money's Worth?
Pension reforms normally focus on the accumulation phase, plus term insurance that provides bnefits for the disabled and for dependent survivors, all of which are immediate concerns. Decumulation of the capital in workers' retirement savings a...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2000/11/717423/annuity-markets-comparative-perspective-consumers-moneys-wotrth http://hdl.handle.net/10986/19775 |
| Summary: | Pension reforms normally focus on the
accumulation phase, plus term insurance that provides
bnefits for the disabled and for dependent survivors, all of
which are immediate concerns. Decumulation of the capital in
workers' retirement savings accounts appears to be far
in the future. But in the second generation of reforms,
countries have begun paying attention to eventual
decumulation--either through gradual withdrawals or through
annuitization, which provides longevity insurance. At this
point, it becomes important to learn whether annuity markets
exist and how they operate. The authors summarize
preliminary results of a continuing research project that
analyzes annuity markets in Australia, Canada, Chile,
Israel, Singapore, Switzerland, and the United Kingdom. They
focus on understanding whether annuity markets can be relied
upon to provide reliable retirement income at reasonable
prices. One way to approach this question is to explore
whether the expected payouts and the
"money's-worth ratio" differ across
countries, and if so, why, and what light can be thrown on
the existence and amount of adverse selection. Annuity
markets are poorly designed for various reasons: worker
myopia, precautionary and bequest saving (not erved by most
annuity products), distrust of insurance companies (and
unwillingness to turn sizeable savings over to them),
adverse selection, and the crowding-out effect of social
security (Which automatically annuitizes the largest share
of people's retirement wealth). Preliminary findings
suggest that the cost of annuities is lower than might be
expected. When the risk-free discount rate is used, the
money's-worth ratios of nominal annuities based on
annuitant mortality tables exceed 90 percent--neither the
industry "take" nor the effects of adverse
selection appear to be as large as anticipated. But real
annuities (in Chile, Israel, and the United Kingdom) have
money's-worth ratios 7 to 9 percent lower than those of
nominal annuities. And when the "riskier"
corporate bond rate is used for discounting purposes, there
is a further 7 percent reduction. The main policy issues
include public versus private provision, the role of
insurance companies in term and risk intermediation, the
level of compulsory annuitization, and the need for robust
regulation of annuity providers. |
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