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Optimal Mandates and The Welfare Cost of Asymmetric Information: Evidence from The U.K. Annuity Market*

Einav, Liran; Finkelstein, Amy; Schrimpf, Paul
Fonte: PubMed Publicador: PubMed
Tipo: Artigo de Revista Científica
Publicado em 01/05/2010 Português
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27.28%
Much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected. Once detected, however, there has been little attempt to quantify its welfare cost, or to assess whether and what potential government interventions may reduce these costs. To do so, we develop a model of annuity contract choice and estimate it using data from the U.K. annuity market. The model allows for private information about mortality risk as well as heterogeneity in preferences over different contract options. We focus on the choice of length of guarantee among individuals who are required to buy annuities. The results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first best symmetric information benchmark by about £127 million per year, or about 2 percent of annuitized wealth. We also find that by requiring that individuals choose the longest guarantee period allowed, mandates could achieve the first-best allocation. However, we estimate that other mandated guarantee lengths would have detrimental effects on welfare. Since determining the optimal mandate is empirically difficult, our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest.

Annuities and Other Retirement Products : Designing the Payout Phase

Rocha, Roberto; Vittas, Dimitri; Rudolph, Heinz P.
Fonte: World Bank Publicador: World Bank
Português
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27.93%
This book examines recent changes in the landscape of retirement products and annuity markets in five countries. All the selected countries (Australia, Chile, Denmark, Sweden, and Switzerland) have mandatory or quasi-mandatory savings schemes. But they also exhibit significant differences in the structure of their pension systems, the relative importance of public pillars, the role and structure of private provision, the level of annuitization, and the structure and focus of their regulatory frameworks. Five studies have been commissioned to examine the state of annuity markets in each of these countries. The findings of these studies are summarized in the last five chapters of this book. The chapters of this book is discusses the various risks faced by pensioners and the risk characteristics of alternative retirement products, and it reviews the risks faced by providers of retirement products and the management and regulatory challenges of dealing with those risks. The chapter then discusses the risks faced by providers and reviews the challenges of various regulatory issues...

A Summary and Update of Developing Annuities Markets : The Experience of Chile

Rocha, Roberto; Rudolph, Heinz P.
Fonte: Banco Mundial Publicador: Banco Mundial
Português
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27.82%
The rapid growth of the market for retirement products in Chile has its origins in the pension reform that was implemented in 1981. But the successful development of an active annuity market also reflects many other factors. This paper summarizes and updates an earlier longer study on the development of the Chilean annuity market. The update focuses on the numerous changes that were introduced in 2008. The most striking aspect of the Chilean experience is the very high rate of annuitization. This has been linked to the restrictions that have been applied to lump-sum withdrawals, the offer of inflation-protected annuities, and the robust prudential regulation of providers. But the level of annuitization has also been supported by the annuitization incentives provided to early retirees and the influence of brokers and sales agents. The recent regulatory changes have weakened the impact of the last two factors, while strengthening the demand for annuities at normal retirement.

The Mexican Pension Annuity Market

Impavido, Gregorio
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Português
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37.67%
This paper analyzes the performance and development of the Mexican pension annuity market established as a consequence of the 1997 pension reform. The Mexican experience displays interesting characteristics providing lessons for other countries that still need to design the decumulation phase of their newly established second pillars. At the same, time it raises some technical and policy concerns that need addressing as they could hamper, in the future, the healthy development of the market. The paper concludes that: 1) general life insurance companies may better hedge longevity risk than specialized annuity companies; 2) competition should be based on prices rather than additional products; 3) better disclosure of options under the 1973 and 1997 social security laws should be given to disability and life annuitants; and 4) various measures should be taken to improve asset liability management including allowing companies to trade over the counter derivatives and substituting over time the regulatory asset liability management framework with an economic asset liability management framework.

Annuity Markets in Chile : Competition, Regulation - and Myopia?

Walker, Eduardo
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Português
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37.91%
The author studies annuity rates in Chile and relates them with industry competition. He finds (1) that annuity insurance companies paying higher broker commissions paid lower annuity rates; and (2) a structural break of the long-run elasticity of annuity rates to the risk-free rate in 2001. Moreover, this structural break coincided with the submission of a new draft pension law proposing greater transparency in annuity markets and a generalized drop in broker commissions. The high commissions charged in the 1990s were partly returned to annuitants as informal (and illegal) cash rebates. Myopic pensioners preferred cash rebates over present values. Thus, the legal threat caused the drop in broker commissions, reduced the illegal practice of cash rebates, increased competition by way of annuity rates, and raised the long-run elasticity to one.

Policies to Promote Saving for Retirement : A Synthetic Overview

Vittas, Dimitri
Fonte: World Bank, Washington, D.C. Publicador: World Bank, Washington, D.C.
Português
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The author argues that public and private pillars are essential for a well-functioning pension system. Public pillars, funded or unfounded, offer basic benefits that are independent of the performance of financial markets. Since financial markets suffer from prolonged, persistent, and large deviations from long-term trends, they cannot be relied on as the sole provider of pension benefits. Funded pillars provide benefits that are based on long-term capital accumulation and financial market performance. But they need to be privately managed to minimize dependence on public sector institutions and avoid government dominance of the economy and financial markets. The author focuses mainly on the promotion, structure, and regulation of funded pillars. He discusses the case for using compulsion and tax incentives, for exempting some categories of workers such as the very young (under 25), the very old (over the normal retirement age), the very poor (those earning less than 40 percent of the average wage), and the self-employed...

A Conceptual Framework for Retirement Products: Risk Sharing Arrangements Between Providers and Retirees

Impavido, Gregorio; Thorburn, Craig; Wadsworth, Mike
Fonte: World Bank, Washington, D.C. Publicador: World Bank, Washington, D.C.
Português
Relevância na Pesquisa
27.78%
Voluntary annuity markets are, in most countries, smaller than what the theoretical and part of the empirical literature would suggest. There are both demand and supply constraints that hamper the development of annuity markets. In particular, traditional products available in most countries can require excessive minimum capital requirements for given investment opportunities available to providers. Investment and longevity risk should be shared between providers and annuitants so that supply constraints can be relaxed. Alternative annuity products, which imply risk sharing, could be backed by substantially lower capital investments or, equivalently, provided at substantially lower prices to consumers.

The Gender Impact of Pension Reform : A Cross-Country Analysis

James, Estelle; Edwards, Alejandra Cox; Wong, Rebecca
Fonte: World Bank, Washington DC Publicador: World Bank, Washington DC
Português
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27.58%
Pension systems may have a different impact on gender because women are less likely than men to work in formal labor markets and earn lower wages when they do. Recent multipillar pension reforms tighten the link between payroll contributions and benefits, leading critics to argue that they will hurt women. In contrast, supporters of these reforms argue that it will help women by the removal of distortions that favored men and the better targeted redistributions in the new systems. To test these conflicting claims and to analyze more generally the gender effect of alternative pension systems, the authors examine the differential impact of the new and old systems in three Latin American countries-Argentina, Chile, and Mexico. Based on household survey data, they simulate the wage and employment histories of representative men and women, the pensions they are likely to generate under the new and old rules, and the relative gains or losses of men and women because of the reform. The authors find that women do accumulate private annuities that are only 30-40 percent those of men in the new systems. But this effect is mitigated by sharp targeting of the new public pillars toward low earners...

The Swiss Multi-Pillar Pension System: Triumph of Common Sense?

Queisser, Monika; Vittas, Dimitri
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Português
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27.58%
The authors provide a detailed study of the Swiss pension system, analyzing its strengths and weaknesses. The unfunded public pillar is highly redistributive. It has near universal coverage, a low dispersion of benefits (the maximum public pension is twice the minimum), and no ceiling on contributions. Low-income pensioners receive means-tested supplementary benefits. Payroll taxes are low, but government transfers cover 27 percent of total benefits. Total benefits amount to 9.1 percent of GDP, equivalent to 15.2 percent of covered earnings. The funded private pillar was made compulsory in a defensive move against the relentless expansion of the public pillar. The compulsory pillar stipulates minimum benefits in the form of age-related credits, a minimum interest rate on accumulated credits, and a minimum annuity conversion factor, aimed to smooth changes in interest rates over time. Low-income workers are not required to participate in the second pillar. The first and second pillars as well as supplementary benefits are admirably integrated. Company pension plans are free to set terms and conditions in excess of these minimums, and most offer benefits exceeding obligatory levels. The second pillar has accumulated large financial resources...

An Empirical Analysis of the Annuity Rate in Chile; Journal of Pension Economics and Finance

Rocha, Roberto; Morales, Marco; Thorburn, Craig
Fonte: Banco Mundial Publicador: Banco Mundial
Tipo: Journal Article; Journal Article
Português
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27.46%
Empirical analyses of annuities markets have been limited to a few developed countries and restricted by data limitations. Chile provides excellent conditions for research on annuities due to the depth of its market and the availability of data. The paper utilizes a panel of life insurance company data to examine econometrically the main determinants of the annuity rate, defined as the internal rate of return on annuities. The results indicate that the annuity rate is determined by the risk-free interest rate, the share of privately issued higher yield securities in the portfolio of providers, as a proxy for the spread over the risk-free rate, the leverage of providers, the level of broker's commissions, the market share of individual providers, the level of the premium, and the degree of market competition. The results also show that efforts to improve market transparency produced structural shifts in the parameters of the annuity rate equation. The results are consistent with separate research on money's worth ratios, and indicate the need to develop appropriate financial instruments, allowing providers to hedge their risks while extracting higher returns, and also to ensure competition and transparency in annuities markets, in order to ensure good outcomes for annuitants.

The Australian Annuity Market

Knox, David M.
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Tipo: Publications & Research :: Policy Research Working Paper; Publications & Research
Português
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27.73%
In Australia, a means-tested old-age public pension is paid from general tax revenues. A full pension (equivalent to roughly a quarter of the average wage) is currently paid to more than half the aged population, and a reduced pension is paid to another quarter of the aged population. About 20 percent receive no old-age public pension because of the level of their income or assets. There is also a compulsory system under which employers contribute at least 7 percent of salaries into a superannuation plan for the vast majority of employees. (This minimum rate will gradually rise to 9 percent in 2002.) More than 80 percent of superannuation benefits are received as lump sums; when public sector employees are excluded, the figure rises to almost 90 percent. The market for private life annuities with longevity insurance is very small. Greater use is made of allocated annuities, which are similar to income drawdowns in the United Kingdom or scheduled withdrawals in Latin American countries. The value of life annuities...

Annuity Markets in Comparative Perspective : Do Consumers Get Their Money's Worth?

James, Estelle; Vittas, Dimitri
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Tipo: Publications & Research :: Policy Research Working Paper; Publications & Research
Português
Relevância na Pesquisa
37.93%
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...

An Analysis of Money's Worth Ratios in Chile

Thorburn, Craig; Rocha, Roberto; Morales, Marco
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Tipo: Publications & Research :: Policy Research Working Paper; Publications & Research
Português
Relevância na Pesquisa
27.78%
Empirical analyses of annuities markets have been limited to a few industrial countries and restricted by data limitations. Chile provides excellent conditions for research on annuities because of the depth of its market and the availability of data. The authors use an extensive dataset on individual annuities to examine econometrically a measure of market performance-money's worth ratios (MWRs)-or the ratio of the expected present value of annuity payments to the premium. The results show that annuitants in Chile have generally a good deal for their premiums, as indicated by MWRs higher than one, and also higher than those estimated for other countries. The difference between Chile and other countries is striking considering that annuities in Chile are indexed to prices. The wide range of indexed instruments in Chile, allowing providers to hedge their risks while extracting higher returns, helps explain the difference. The high degree of market competition has also contributed to this outcome. Efforts to improve market transparency through a new electronic quotation system have decreased the dispersion of MWRs. Finally, MWRs tend to decrease for contracts with longer durations, reflecting pricing for higher longevity and reinvestment risks. These results are consistent with separate research on the annuity rate...

An Empirical Analysis of the Annuity Rate in Chile

Rocha, Roberto; Morales, Marco; Thorburn, Craig
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Tipo: Publications & Research :: Policy Research Working Paper; Publications & Research
Português
Relevância na Pesquisa
37.82%
Empirical analyses of annuities markets have been limited to a few industrial countries and restricted by data limitations. Chile provides excellent conditions for research on annuities because of the depth of its market and the availability of data. The authors use a panel of life insurance company data to examine econometrically the main determinants of the annuity rate, defined as the internal rate of return on annuities. The results indicate that the annuity rate is determined by the risk-free interest rate, the share of privately-issued higher yield securities in the portfolio of providers as a proxy for the spread over the risk-free rate, the leverage of providers, the level of broker's commissions, the market share of individual providers, the level of the premium, and the degree of market competition. The results also show that efforts to improve market transparency produced structural shifts in the parameters of the annuity rate equation. The results are consistent with separate research on money's worth ratios, and indicate the need to develop appropriate financial instruments, allowing providers to hedge their risks while extracting higher returns, and also to ensure competition and transparency in annuities markets, in order to ensure good outcomes for annuitants.

The Decumulation (Payout) Phase of Defined Contribution Pillars : Policy Issues in the Provision of Annuities and Other Benefits

James, Estelle; Vittas, Dimitri
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Tipo: Publications & Research :: Policy Research Working Paper; Publications & Research
Português
Relevância na Pesquisa
27.58%
Most countries reforming their pension system, focus more on the accumulation phase, than on the decumulation (pay-out), because the number of beneficiaries is likely to be small initially, especially if older workers are discouraged from joining the new system. Policymakers place a priority on the new accumulation system being administratively efficient, and well regulated. But the decumulation phase must also be well organized, and efficient. The purpose of pension systems is, after all, to pay retirement benefits - old age, survivor, and disability pensions. The authors argue that: 1) Pay-out arrangements are likely to evolve gradually, through trial and error, as problems are discovered and tackled. 2) Adverse selection may not be as great a problem as is sometimes thought. 3) Many other annuity, and insurance market problems have yet to be solved, and policies must be formulated to make these markets work as well. The under-development of voluntary annuity markets is only partly explained by adverse selection...

A roughly smooth optimal consumption path: smoothing the rough annuity puzzle

Salgado, Regis Baratti Lima
Fonte: Fundação Getúlio Vargas Publicador: Fundação Getúlio Vargas
Tipo: Tese de Doutorado
Português
Relevância na Pesquisa
37.28%
A inconsistência entre a teoria e o comportamento empírico dos agentes no que tange ao mercado privado de pensões tem se mostrado um dos mais resistentes puzzles presentes na literatura econômica. Em modelos de otimização intertemporal de consumo e poupança sob incerteza em relação ao tempo de vida dos agentes, anuidades são ativos dominantes, anulando ou restringindo fortemente a demanda por ativos cujos retornos não estão relacionados à probabilidade de sobrevivência. Na prática, entretanto, consumidores são extremamente céticos em relação às anuidades. Em oposição ao seguro contra longevidade oferecido pelas anuidades, direitos sobre esses ativos - essencialmente ilíquidos - cessam no caso de morte do titular. Nesse sentido, choques não seguráveis de liquidez e a presença de bequest motives foram consideravelmente explorados como possíveis determinantes da baixa demanda verificada. Apesar dos esforços, o puzzle persiste. Este trabalho amplia a dominância teórica das anuidades sobre ativos não contingentes em mercados incompletos; total na ausência de bequest motives, e parcial, quando os agentes se preocupam com possíveis herdeiros. Em linha com a literatura, simulações numéricas atestam que uma parcela considerável do portfolio ótimo dos agentes seria constituída de anuidades mesmo diante de choques de liquidez...

A policyholder's utility indifference valuation model for the guaranteed annuity option

Grasselli, Matheus R; Silla, Sebastiano
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 21/08/2009 Português
Relevância na Pesquisa
27.58%
Insurance companies often include very long-term guarantees in participating life insurance products, which can turn out to be very valuable. Under a guaranteed annuity options (G.A.O), the insurer guarantees to convert a policyholder's accumulated funds to a life annuity at a fixed rated when the policy matures. Both financial and actuarial approaches have been used to valuate of such options. In the present work, we present an indifference valuation model for the guaranteed annuity option. We are interested in the additional lump sum that the policyholder is willing to pay in order to have the option to convert the accumulated funds into a lifelong annuity at a guaranteed rate.; Comment: 22 pages, 5 figures

A State-Space Estimation of the Lee-Carter Mortality Model and Implications for Annuity Pricing

Fung, Man Chung; Peters, Gareth W.; Shevchenko, Pavel V.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 03/08/2015 Português
Relevância na Pesquisa
27.46%
In this article we investigate a state-space representation of the Lee-Carter model which is a benchmark stochastic mortality model for forecasting age-specific death rates. Existing relevant literature focuses mainly on mortality forecasting or pricing of longevity derivatives, while the full implications and methods of using the state-space representation of the Lee-Carter model in pricing retirement income products is yet to be examined. The main contribution of this article is twofold. First, we provide a rigorous and detailed derivation of the posterior distributions of the parameters and the latent process of the Lee-Carter model via Gibbs sampling. Our assumption for priors is slightly more general than the current literature in this area. Moreover, we suggest a new form of identification constraint not yet utilised in the actuarial literature that proves to be a more convenient approach for estimating the model under the state-space framework. Second, by exploiting the posterior distribution of the latent process and parameters, we examine the pricing range of annuities, taking into account the stochastic nature of the dynamics of the mortality rates. In this way we aim to capture the impact of longevity risk on the pricing of annuities. The outcome of our study demonstrates that an annuity price can be more than 4% under-valued when different assumptions are made on determining the survival curve constructed from the distribution of the forecasted death rates. Given that a typical annuity portfolio consists of a large number of policies with maturities which span decades...

Pricing Variable Annuity Guarantees in a Local Volatility framework

Deelstra, Griselda; Rayée, Grégory
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Português
Relevância na Pesquisa
27.46%
In this paper, we study the price of Variable Annuity Guarantees, especially of Guaranteed Annuity Options (GAO) and Guaranteed Minimum Income Benefit (GMIB), and this in the settings of a derivative pricing model where the underlying spot (the fund) is locally governed by a geometric Brownian motion with local volatility, while interest rates follow a Hull-White one-factor Gaussian model. Notwithstanding the fact that in this framework, the local volatility depends on a particularly complicated expectation where no closed-form expression exists and it is neither directly related to European call prices or other liquid products, we present in this contribution different methods to calibrate the local volatility model. We further compare Variable Annuity Guarantee prices obtained in three different settings, namely the local volatility, the stochastic volatility and the constant volatility models all combined with stochastic interest rates and show that an appropriate volatility modelling is important for these long-dated derivatives. More precisely, we compare prices of GAO, GMIB Rider and barrier types GAO obtained by using local volatility, stochastic volatility and constant volatility models.

How deep is the annuity market participation puzzle?

Inkmann, Joachim; Lopes, Paula; Michaelides, Alexander
Fonte: Financial Markets Group, London School of Economics and Political Science Publicador: Financial Markets Group, London School of Economics and Political Science
Tipo: Monograph; NonPeerReviewed Formato: application/pdf
Publicado em /07/2007 Português
Relevância na Pesquisa
27.73%
Using U.K. microeconomic data, we analyze the empirical determinants of voluntary annuity market demand. We find that annuity market participation increases with financial wealth, life expectancy and education and decreases with other pension income and a possible bequest motive for surviving spouses. We then show that these empirically-motivated determinants of annuity market participation have the same, quantitatively important, e¤ects in a life-cycle model of annuity demand, saving and portfolio choice. Moreover, reasonable preference parameters predict annuity demand levels comparable to the data, thereby questioning the conventional wisdom that limited annuity market participation is a puzzle to be explained.