Regulation of withdrawals in individual account systems

Funded mandatory pension systems based on individual accounts are spreading around the world. With the maturation of those systems, regulating the withdrawal of retirement savings will become increasingly important. Government regulation of withdrawals should mandate the purchase of inflation-indexed life annuities exceeding income available from government welfare programs for the retiree and potential survivors. However, proper functioning of insurance markets does not require annuitizing the entire account balance. Instead, more flexibility for the choice of withdrawals could be permitted for any remaining funds, helping to tailor income streams to individual needs and living arrangements.Pensions&Retirement Systems,Environmental Economics&Policies,Economic Theory&Research,Financial Intermediation,Insurance&Risk Mitigation

Betting on Death and Capital Markets in Retirement: A Shortfall Risk Analysis of Life Annuities versus Phased Withdrawal Plans

How might retirees consider deploying the retirement assets accumulated in a defined contribution pension plan? One possibility would be to purchase an immediate annuity. Another approach, called the “phased withdrawal” strategy in the literature, would have the retiree invest his funds and then withdraw some portion of the account annually. Using this second tactic, the withdrawal rate might be determined according to a fixed benefit level payable until the retiree dies or the funds run out, or it could be set using a variable formula, where the retiree withdraws funds according to a rule linked to life expectancy. Using a range of data consistent with the German experience, we evaluate several alternative designs for phased withdrawal strategies, allowing for endogenous asset allocation patterns, and also allowing the worker to make decisions both about when to retire and when to switch to an annuity. We show that one particular phased withdrawal rule is appealing since it offers relatively low expected shortfall risk, good expected payouts for the retiree during his life, and some bequest potential for the heirs. We also find that unisex mortality tables if used for annuity pricing can make women’s expected shortfalls higher, expected benefits higher, and bequests lower under a phased withdrawal program. Finally, we show that delayed annuitization can be appealing since it provides higher expected benefits with lower expected shortfalls, at the cost of somewhat lower anticipated bequests.

The mechanics and regulation of variable payout annuities

This paper discusses the mechanics and regulation of participating and unit-linked variable payout annuities. These annuities offer benefits that are not fixed in either nominal or real terms but depend on the performance of the fund or funds in which the underlying reserve assets are invested, their profit sharing features, and the treatment of longevity risk. The paper focuses on the treatment of investment and longevity risks by different types of these annuities and underscores the challenge of establishing a robust and effective framework of regulation and supervision for these products. The paper also addresses the exposure of annuitants to integrity risk and places special emphasis on the need for a high level of meaningful transparency.Debt Markets,Insurance&Risk Mitigation,Investment and Investment Climate,Pensions&Retirement Systems,Non Bank Financial Institutions

How do unisex life care annuities embedded in a pay-as-you-go retirement system affect gender redistribution?

This paper aims to assess gender redistribution when using unisex conversion factors to compute the initial benefit of life care annuities (LCAs) embedded in a pay-as-you-go (PAYG) pension system. We use a method based on actuarial factors to disentangle the hidden redistribution of LCAs with graded benefits. The value of the actuarial factor relies on a multistate framework in which transitions are modeled from the initial health state to the absorbing state. According to our calculations for Australia and the US, the amount of gender redistribution is by no means irrelevant. In spite of the very different biometric data, the results are surprisingly similar for both countries. Risk equalization based on the “equal treatment” of men and women may not be fair, given that age, gender and health state are very significant risk factors in computing the initial benefit in a system covering retirement and long-term care

Putting the Pension Back in 401(k) Plans: Optimal versus Default Longevity Income Annuities

Most retirees take payouts from their defined contribution pensions as lump sums, but the US Treasury recently moved to encourage firms and individuals to convert some of the $15 trillion in plan balances into longevity income annuities paying lifetime benefits from age 85 onward. We evaluate the welfare implications of this reform using a calibrated lifecycle consumption and portfolio choice model embodying realistic institutional considerations. We show that defaulting a fixed fraction of workers’ 401(k) assets over a dollar threshold is a cost-effective and appealing way to enhance retirement security, enhancing welfare by up to 20% of retiree plan accruals

The gender impact of pension reform : a cross-country analysis

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, many of whom are women, and by restrictions on payouts from the private pillars, particularly joint annuity requirements. As a result of these transfers, total lifetime retirement benefits for women reach 60-80 percent those of men, and for"full career"women they equal or exceed benefits of men. Also as a result, women are the biggest gainers from the pension reform. For women who receive these transfers, female/male ratios of lifetime benefits in the new systems exceed those in the old systems in all three countries. Private intra-household transfers from husband to wife in the form of joint annuities play the largest role.Pensions&Retirement Systems,Public Health Promotion,Health Monitoring&Evaluation,Population&Development,Gender and Development,Health Monitoring&Evaluation,Pensions&Retirement Systems,Population&Development,Agricultural Knowledge&Information Systems,Anthropology

Designing the payout phase of funded pension pillars in central and eastern European countries

Over the past decade or so, most Central and Eastern European countries have reformed their pension systems, significantly downsizing their public pillars and creating private pillars based on capitalization accounts. Early policy attention was focused on the accumulation phase but several countries are now reaching the stage where they need to address the design of the payout phase. This paper reviews the complex policy issues that will confront policymakers in this effort and summarizes recent plans and developments in four countries (Poland, Hungary, Estonia, and Lithuania). The paper concludes by highlighting a number of options that merit detailed consideration.Debt Markets,Pensions&Retirement Systems,Financial Literacy,Insurance&Risk Mitigation,Investment and Investment Climate

Pension Policy: The Search for Better Solutions

Turner identifies the current problems facing pension policy for U.S. employer-provided pension plans and recommends solutions to those problems based on his examination of pension systems in other industrialized nations.https://research.upjohn.org/up_press/1027/thumbnail.jp

Longevity Risk and Capital Markets: The 2015-16 Update

International audienc