Life Annuity Products and Their Guarantees (eBook)
108 Seiten
OECD Publishing (Verlag)
978-92-64-26531-8 (ISBN)
This publication helps policy makers to better understand annuity products and the guarantees they provide in order to optimise the role that these products can play in financing retirement. Product design is a crucial factor in the potential role of annuity products within the pension system, along with the cost and demand for these products, and the resulting risks that are borne by the annuity providers. Increasingly complex products, however, pose additional challenges concerning consumer protection. Consumers need to be aware of their options and have access to unbiased and comprehensible advice and information about these products.
This publication helps policy makers to better understand annuity products and the guarantees they provide in order to optimise the role that these products can play in financing retirement. Product design is a crucial factor in the potential role of annuity products within the pension system, along with the cost and demand for these products, and the resulting risks that are borne by the annuity providers. Increasingly complex products, however, pose additional challenges concerning consumer protection. Consumers need to be aware of their options and have access to unbiased and comprehensible advice and information about these products.
Foreword 5
Table of contents 7
Executive summary 9
Key findings and conclusions 9
Annuity product features and design 9
Coherence in the design of the pension framework 10
Encouragement of the demand for annuity products 10
Ensuring the sustainability of annuity products 10
Ensuring the suitability of annuity products for consumers 10
Chapter 1 What is an annuity product? 11
Criteria to define an annuity product 13
Defining the scope of what types of income streams are considered to be annuity products 13
Defining the types of products that are considered to be annuity products 14
Structure and features of annuity products 16
Table 1.1. Classification of annuity products 18
Notes 19
Chapter 2 Overview of the different types of annuity products 21
Level/(de)escalating annuities 22
Advanced life deferred annuities 22
Enhanced annuities 23
Inflation indexed annuities 23
Participating life annuities 23
Variable payout annuities 24
Variable annuities 25
Fixed indexed annuities 26
Table 2.1. Most common annuity product by jurisdiction 26
Notes 27
References 27
Chapter 3 The risks presented by annuity products and how they are managed 29
Modern approaches to risk management 30
Risks faced by annuity providers 30
Drivers of the risk exposures of annuity products 32
Table 3.1. Risk drivers and risk management tools for annuity providers by product type 33
Risk management of annuity products 33
Risk management of fixed payment annuities 33
Risks posed by indexed payment annuities and how they are managed 41
Figure 3.1. Illustrated evolution of annuity payments for a VPA beginning at age 65 46
Risks posed by retirement savings products with a guaranteed income option and how they are managed 47
Figure 3.2. Illustration of guarantee forms 50
Table 3.2. Risk exposures from variable annuity product design 51
Table 3.3. Hedging strategies for variable annuities 55
Box 3.1. Definitions of plain vanilla options 56
Table 3.4. Risks hedged for variable annuities 57
Figure 3.3. Illustration of delta hedging 58
Notes 62
References 62
Chapter 4 Drivers of annuity product availability, design and sustainability 65
The role of annuity products within the pension system 66
Consumer demand: the trade-off between protection, flexibility and cost 69
The framework and tools for managing risks to ensure the sustainability of annuity products 72
Notes 78
References 78
Chapter 5 Ensuring suitable products for consumers 81
Product awareness 82
Box 5.1. Money’s worth ratios 84
Table 5.1. Money’s worth ratios for selected annuity markets 85
Product distribution 85
Product disclosure 89
The potential role of technology 92
Notes 93
References 93
Chapter 6 Policy considerations with respect to annuity products 95
Defining a common language 96
Designing a coherent framework for retirement 97
Keeping up with innovation: Ensuring sustainable and suitable annuity products 100
Encouraging appropriate risk management 102
Summary of policy considerations 104
Note 105
Glossary 107
Chapter 1. What is an annuity product?
This chapter presents the scope and the definition of the annuity products discussed in this publication. It also proposes a classification for the various types of annuity products available to finance retirement.
The definition of an annuity product at first glance seems simple. It is a product which offers a stream of income payments to be paid to the individual. Nevertheless the literature and discussion of annuities, annuity income, and annuity markets is fraught with misunderstanding and a lack of comparability. ‘Annuity income’ is commonly used to refer not only to income received from annuity products, but to employer provided defined benefit pensions, or even to the income that individuals receive from public pensions. Data provided on the size of annuity markets with the purpose of demonstrating the relative role of these products in providing income in retirement may include data on ‘annuity products’ from which no income is expected to be received, or alternatively for which no income is guaranteed. Even terminology used to label certain types annuity products can be applied to two different products which bear no resemblance to one another.
In order to be able to begin an analysis and discussion of annuity products, we must first come to an agreement on what exactly is being discussed. First, the aim of the discussion on annuity products here is to better understand how they can fit into the retirement landscape, therefore the focus is on annuities whose primary purpose is to provide income in retirement. As such, annuities providing income due to disability or to cover healthcare costs are not considered here. While these additional guarantees covering health issues can be embedded in the types of products discussed here, the scope of this discussion does not cover the associated product designs and risks of these types of products.
Beyond the scope of products providing income in retirement, a more precise definition needs to be laid out in order to distinguish between vehicles providing ‘annuity income’, products which may be commonly referred to as annuities but do not actually function as such, and products which actually provide no guarantees at all. While public pensions and defined benefit plans can provide annuity income, they should not be in the scope of the discussion on annuity products here. Similarly products referred to as ‘annuities’ but that never result in a guaranteed income being paid should be excluded. Finally, while drawdown products providing structure to the payout phase could also potentially play an important role in the evolving retirement landscape, they are not the focus of the discussion here as no longevity guarantees are generally provided.
Coming to an agreement on the definition and classification annuity products will provide the foundation on which annuity products can be discussed and their features, guarantees and market size compared across jurisdictions. With this aim, this chapter first puts forward a set of criteria on which to base the definition of an annuity product for the discussion presented here, and justifies this definition based on concrete examples from different jurisdictions. Based on these criteria, a classification of different categories and types of annuity products is then proposed to provide a foundation for defining a common language with which to subsequently base the discussion of annuity markets, products and their guarantees contained in this publication.
Criteria to define an annuity product
The criteria presented here seek to provide answers to the questions raised regarding the features which are necessary to qualify any given income stream or product as an annuity product, given that the scope of this publication is to discuss annuity products as a solution to provide guaranteed income in retirement. These criteria are meant to be exhaustive, and each criterion will be clarified and discussed in turn.
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An annuity product is fully financed by the contributions or premiums towards its purchase.
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Payments are calculated on an actuarially fair basis.
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The provider of the annuity product is the entity which promises payments to the individual or member.
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The employer is not the guarantor of the promised payments.
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There is a longevity insurance component in the promised payments.
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Where receiving a future income stream from a deferred annuity is optional, the annuity conversion rate is defined at the onset of the contract.
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Where receiving a future income stream from a deferred annuity is mandatory, the provision of the future income is established in the same contract that was established for the accumulation of the assets.
Defining the scope of what types of income streams are considered to be annuity products
An annuity product is fully financed by the contributions or premiums towards its purchase
The first criterion is that an annuity product should be fully financed by the contributions or premiums towards its purchase. This criterion in part addresses the distinction between what is considered annuity income and what is considered to be an annuity product. A product which is fully financed by contributions would generally require that premiums or contributions are put aside to fund the reserves which back the expected future annuity payments. This criterion therefore excludes PAYG pension schemes from the scope, as contributions go to fund current pensions rather than being saved to fund the future payments being promised.
Payments are calculated on an actuarially fair basis
The criterion that payments are calculated on an actuarially fair basis further clarifies the distinction between annuity income and an annuity product. Calculating payments on an actuarially fair basis means that the promised payments are computed based on a discount rate and mortality assumptions which reasonably reflect conditions at the time the annuity is purchased. This implies a direct link between contributions/premiums paid towards the annuity and the actual level of income received. Defined benefit schemes would therefore be excluded as there is not a direct link between contributions made and the promised payment.
The provider of the annuity product is the entity which promises payments to the individual or member
Requiring that the provider of the annuity product directly guarantees the income promised to the individual or member intends to make the distinction between annuities directly providing an income guarantee to the primary recipient and those purchased to reinsure income guarantees for the primary recipients. While an important topic in itself, annuity products used for de-risking other pension or annuity promises are not within the scope of the discussion here, which focuses on annuity products providing retirement income to individuals.
As such, buy-in deals common in the UK, where a pension plan purchases a bulk annuity from insurer or reinsurer to partially or totally insure its pension obligations, are not within scope. Similarly, reinsurance purchased to cover an insurer’s annuity portfolio is not in scope either. These are explicit de-risking tools for entities rather than retirement solutions for the payout phase for individuals.
On the other hand, products like group annuities purchased by employers (e.g. as in Denmark) in which the promised payment is made directly by the pension fund or the insurance company are different from those examples in which the promises are reinsured by a third party, and would therefore qualify as an annuity product.
The employer is not the guarantor of the promised payments
A final criterion clarifying the scope is that the employer is not the guarantor of annuity payments. This may not be the case for specific employer provided pensions.
For example, any employer provided pensions which are kept on a book reserve basis would not be in scope as the employer has the liabilities on its balance sheet and guarantees the payments. While these types of arrangements can play an important role in the design of the payout phase, they are out of scope of the discussion put forward here.
Defining the types of products that are considered to be annuity products
A longevity insurance component is involved with the promised payments
Requiring that a longevity insurance component is involved with the promised payments delineates the difference between an annuity product and other drawdown products which can provide structure for the pay-out phase. An annuity product must provide some kind of longevity insurance guarantee to the individual guaranteeing payments for life.
There is no insurance component in the case of programmed withdrawals, as even though regular payments are provided, individuals runs the risk of depleting their fund before anticipated. Insurance wrappers for programmed withdrawals, however, could provide that insurance component. This includes the Guaranteed Lifetime Withdrawal Benefit offered with variable annuity products, which guarantees a minimum income if funds are depleted. Annuities whose payments can vary but which guarantee a minimum income level or income for life would also be considered to have an insurance component.
While term annuities guaranteeing a certain level of income for a fixed period of time, not for life, could also be considered to be annuities, these types of products are analogous to bond instruments and will not be the focus of the discussion on annuity products here.
Where receiving a future income stream...
| Erscheint lt. Verlag | 5.12.2016 |
|---|---|
| Sprache | englisch |
| Themenwelt | Recht / Steuern ► Wirtschaftsrecht |
| Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung | |
| ISBN-10 | 92-64-26531-7 / 9264265317 |
| ISBN-13 | 978-92-64-26531-8 / 9789264265318 |
| Haben Sie eine Frage zum Produkt? |
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