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Annuity Markets

Edmund Cannon and Ian Tonks

Governments around the world are responding to the rising ratio of elderly-to-young persons (‘The Pensions Crisis’) by shifting their pension policies away from pay-as-you-go systems towards ... More

Governments around the world are responding to the rising ratio of elderly-to-young persons (‘The Pensions Crisis’) by shifting their pension policies away from pay-as-you-go systems towards individual savings schemes. Annuity markets convert retirement savings into an income stream for the lifetime of the pensioner, and understanding how annuity markets function is important for public policy. This book studies these annuity markets. The book starts by outlining the context of public policy towards pensions, and explains the different types of annuities available, focusing on the UK — which has the largest annuity market in the world. It examines how annuities are priced, and describes the techniques of mortality measurement. As a background, it provides a history of annuities, and the experience of annuity markets in a number of other countries. The book outlines the economic theory behind annuities, and explains how annuities insure consumers against longevity risks. It goes on to describe how annuities markets function: how they work and whether they are efficient, leading onto a discussion of the annuity puzzle, including behavioural explanations. The book concludes by discussing the regulatory framework, assets available to back annuity liabilities, and recent developments in annuity markets.Less

European Pensions & Global Finance

Gordon L. Clark

This book is about the demographic and funding crises that threaten systems of pension and retirement income in continental Europe. The book argues that state-sponsored social security will not ... More

This book is about the demographic and funding crises that threaten systems of pension and retirement income in continental Europe. The book argues that state-sponsored social security will not deliver promised retirement incomes for the baby-boom generation; European monetary union and the imperatives of global finance has made such promises untenable thereby undercutting nation-state social solidarity. Globalisation has set many challenges for European countries, not least of which is providing pension security for their citizens. At the same time, global finance has opened-up options for corporations and individuals seeking alternatives to the past; but exercising those opportunities will come at a high cost for European notions of social justice. Drawing upon original research, the book explores the dimensions of the pending European retirement income funding crisis, noting the economic and political forces involved in debates over possible solutions; current country-specific models of pensions provision, making the connection between social security and supplementary pensions; the allocation of risks between individuals, markets, and institutions emphasising the tensions between social solidarity and the market in France, Germany, the Netherlands, and the United Kingdom; and finally, the prospects for a pan-European approach to retirement income provision.Less

Financial Decision Making and Retirement Security in an Aging World

Olivia S. Mitchell, P. Brett Hammond, and Stephen P. Utkus (eds)

As the world’s population lives longer, it will become increasingly important for plan sponsors, retirement advisors, regulators, and financial firms to focus closely on how older persons fare in the ... More

As the world’s population lives longer, it will become increasingly important for plan sponsors, retirement advisors, regulators, and financial firms to focus closely on how older persons fare in the face of rising difficulties with cognition and financial management. This book offers state-of-the-art research and recommendations on how to evaluate when older persons need financial advice, help them make better financial decisions, and to identify policy options for handling these individual and social challenges efficiently and fairly. This latest volume in the Pension Research Council series draws lessons from theory and practice, and will be of interest to employees and retirees, consumers and researchers, and financial institutions working to design better retirement plan offerings.Less

Financial Literacy: Implications for Retirement Security and the Financial Marketplace

Olivia S. Mitchell and Annamaria Lusardi (eds)

As financial markets become increasingly complex and integrated, individuals and their families are increasingly faced with making highly sophisticated and all-too-often irreversible economic ... More

As financial markets become increasingly complex and integrated, individuals and their families are increasingly faced with making highly sophisticated and all-too-often irreversible economic decisions. Nowhere is this more evident than with regard to retirement decision-making: a half-century ago, traditional defined benefit pension schemes were the norm in the United States, Japan, Australia and much of Europe, but these have now been largely replaced with defined contribution pensions. In the process, employer and government judgment regarding how much to save and where to invest has been replaced by individuals having to make these choices on their own (perhaps assisted by advisers they also select on their own). Additionally, participants in defined contribution plans must also decide how to spend down their pension assets and determine whether to annuitize or take their benefits in a single lump sum. The trend toward increased individual responsibility and greater financial complexity extends into other realms of life as well, for example regarding decisions over credit cards, adjustable rate mortgages, and when to claim retirement benefits. This volume focuses on key lessons for financial decision-making in the wake of that crisis, exploring how financial literacy can enhance peoples' skills and abilities to make more informed economic choices. Moreover, given the demographic forces at work and the structure of the labor markets, where workers change jobs and employers many times before retiring, the increase in individual responsibility with regard to financial security after retirement will continue to be a feature of many economies around the world.Less

The Future of Public Employee Retirement Systems

Gary Anderson

Olivia S. Mitchell (ed.)

People covered by public pensions are often the subject of ‘pension envy’, that is, their benefits might seem more generous and their contributions lower than those offered by the private sector. Yet ... More

People covered by public pensions are often the subject of ‘pension envy’, that is, their benefits might seem more generous and their contributions lower than those offered by the private sector. Yet this book points out that such judgments are often inaccurate, since civil servants hold jobs with few counterparts in private industry, such as firefighters, police, judges, and teachers. Often these are riskier, dirtier, and demand more loyalty and discretion than would be required of a more mobile labour force in the private sector. The debate challenges traditional ideas about how the public employee labour contract is structured and raises questions about how such employees are attracted to the public sector, retained and motivated on the job, and retired, via an entire compensation package of wages and benefits. This book explores aspects of these schemes, addressing the cost and valuation debate, along with the political economy of how public pension asset pools are perceived and managed. The discussion also explores ways that public pensions can be strengthened in the US, Japan, Canada, and Germany.Less

How Persistent Low Returns Will Shape Saving and Retirement

Olivia S. Mitchell, Robert Clark, and Raimond Maurer (eds)

Funded pension systems around the world have long relied on relatively high and predictable long-term capital market returns. Yet these retirement systems confront a key challenge today, namely, how ... More

Funded pension systems around the world have long relied on relatively high and predictable long-term capital market returns. Yet these retirement systems confront a key challenge today, namely, how to deal with what appears to be persistently low returns on bonds and equities. For this reason, it will be prudent, and probably necessary, for insurers, plan sponsors, workers, retirees, and policymakers to take concrete steps to prepare for these lower long-term expected rates of return to retirement wealth. In fact, as we show in this volume, a persistent low-interest-rate economy will compel many to revisit how much they save, how they invest, and how long they can afford to live in retirement. Academics, policymakers, and industry leaders debate alternative strategies to cope with these challenges globally, as economic growth remains slow and low returns become the ‘new normal.’Less

Lessons from Pension Reform in the Americas

Stephen J. Kay and Tapen Sinha (eds)

Latin American experiments with pension reform began when Chile converted its public pay-as-you-go system to a system of private individual accounts in the early 1980s. Several other Latin American ... More

Latin American experiments with pension reform began when Chile converted its public pay-as-you-go system to a system of private individual accounts in the early 1980s. Several other Latin American countries then followed suit, inspired both by Chile's reforms and by World Bank recommendations stressing compulsory government-mandated individual saving accounts. Individual accounts were subsequently introduced in a number of countries in Europe and Asia. Many are now re-evaluating these privatizations in an effort to ‘reform the reform’ to make these systems more efficient and equitable. This book assesses pension reforms in this new ‘post-privatization’ era. After a discussion on demographic trends in the foreword by Nobel laureate Robert W. Fogel, Section 1 of the book includes chapters on the role of pension system default options, the impact of gender, and a discussion of the World Bank's policies on pension reform. The chapter on the evidence from Chile's new social protection survey points to key lessons from the world's first privatization. Section 2 offers analysis of several significant reform initiatives in the hemisphere, and includes chapters on the United States, Canada, Mexico, Costa Rica, Brazil, Peru, Uruguay, and Argentina.Less

The Market for Retirement Financial Advice

Olivia S. Mitchell and Kent Smetters (eds)

The market for retirement financial advice has never been more important and yet more in flux. The long-term shift away from traditional defined benefit pensions toward defined contribution personal ... More

The market for retirement financial advice has never been more important and yet more in flux. The long-term shift away from traditional defined benefit pensions toward defined contribution personal accounts requires all of us to be more sophisticated today than ever before. But the landscape for financial advice is changing all over the world, with new rules and regulations transforming the financial advice profession. This volume explores the market for retirement financial advice, to explain what financial advisors do, and how to measure performance and impact. Who are these professionals and what standards must they abide by? How do they make money and what are their incentives? How can one protect clients from bad advice, and what is good advice? Does advice alone effect changes in personal habits? Answering these questions, along with new technology that will decrease the delivery costs of advice, will play a transformative role in helping more households receive the quality financial advice that they need. Accordingly, this volume illuminates the market and regulatory challenges so as to enhance consumer, plan sponsor, and regulator decisions.Less

Recalibrating Retirement Spending and Saving

John Ameriks and Olivia S. Mitchell (eds)

As Baby Boomers are now in their 60s, policymaker and media attention is becoming focused on how this generation will manage during its long period in retirement. This book acknowledges that many, ... More

As Baby Boomers are now in their 60s, policymaker and media attention is becoming focused on how this generation will manage during its long period in retirement. This book acknowledges that many, though not all, in this age group have accumulated substantial assets, so they are now asking themselves what they will do with what they have. The book explores of how people entering retirement will deploy their accumulated assets in the near and long term to meet their myriad spending, investment, and other objectives. The book studies emerging issues regarding assets and expectations on the verge of retirement, including uncertainty regarding life expectancy and morbidity. It is composed of chapters from contributors including a Nobel Laureate and a wonderful mix of academics and practitioners from the legal, financial, and economic fields.Less

Recreating Sustainable Retirement: Resilience, Solvency, and Tail Risk

Olivia S. Mitchell, Raimond Maurer, and P.Brett Hammond (eds)

The financial crisis of the late 2000s and the Great Recession that followed it alerted many of those seeking to protect old-age security to the numerous extreme risks that are confronting the ... More

The financial crisis of the late 2000s and the Great Recession that followed it alerted many of those seeking to protect old-age security to the numerous extreme risks that are confronting the financial and political institutions which comprise our retirement system. This volume offers an in-depth analysis of the “black swans” that threaten private and public pensions around the world. Matters such as capital market shocks, surprises to longevity, regulatory and political risk, and errors in modeling have profound consequences for various stakeholders, including pension plan participants and managers, plan sponsors, policymakers, students, and all others who are seeking to make retirement more resilient. This book analyzes such challenges to retirement sustainability, and it explores ways in which these challenges could be better managed and financed. The insights provided by this book will help to ensure that retirement systems come to be more capable of withstanding what the future will bring.Less

Redefining Retirement: How Will Boomers Fare?

Brigitte Madrian, Olivia S. Mitchell, and Beth J. Soldo (eds)

As the leading edge of the “Baby Boom” generation in the United States reaches sixty years of age, members of this unusually large cohort born between 1946 and 1966 are poised to redefine retirement ... More

As the leading edge of the “Baby Boom” generation in the United States reaches sixty years of age, members of this unusually large cohort born between 1946 and 1966 are poised to redefine retirement — just as they have restructured educational, housing, and labor markets previously. Looking ahead, their numbers and energy are sure to have a major impact on national pensions, healthcare, and social safety nets. This book notes that “Boomers” will be better off than their predecessors in many ways, having benefited from the long run-up in housing prices, dramatic improvements in healthcare, and the expanding economy. On the other hand, the generation's sheer size will surely squeeze resources and require new approaches to retirement risk management. On average, the Boomers are in better financial and physical health than prior cohorts, and they can be anticipated to fare better than current retirees in absolute terms. Yet the distribution of retiree income and wealth will be less equal than in earlier years, and in relative terms, many Boomers will be less well off than their forebears. The chapters in this book use many invaluable models and datasets, including the incomparable Health and Retirement Study (HRS) which affords unique insights into the status of mature adults surveyed at the same age and hence same point in their life cycles, but at three different time periods. Chapter contributors offer new evidence about prospects for health and income during retirement, as well as pensions and housing equity, health, portfolio allocation, and financial literacy.Less

Reimagining Pensions: The Next 40 Years

Olivia S. Mitchell and Richard C. Shea (eds)

The 1964 termination of the Studebaker Corporation’s pension plan wiped out or significantly reduced the pensions of thousands of the automaker’s employees and retirees. In response, the US Congress ... More

The 1964 termination of the Studebaker Corporation’s pension plan wiped out or significantly reduced the pensions of thousands of the automaker’s employees and retirees. In response, the US Congress passed the 1974 Employee Retirement Income Security Act (ERISA), a monumental and revolutionary piece of legislation crafted to address corporate pension underfunding. The bill also set new rules regarding defined benefit (DB) and other retirement plans, and it established the Pension Benefit Guaranty Corporation as a government-run insurer to serve as a backdrop to US corporate pensions. Despite the bill’s far-ranging scope, in the decades since its passage, it has become evident that ERISA failed to achieve many of its intended objectives. The corporate pension scene today is in turmoil, and most private employers have terminated or frozen their traditional DB plans. In their place, employers are increasingly substituting defined contribution (DC) retirement saving plans, which pose a new set of responsibilities on employees and their firms. This volume investigates how and why traditional approaches to pension risk management have failed, and we also explore the new mechanisms required to strengthen retirement security for the future. Lessons from international experience are also included, ranging from Singapore to Switzerland, and the Netherlands to Australia.Less

Reorienting Retirement Risk Management

Robert L. Clark and Olivia S. Mitchell (eds)

Retirement risk management must be dramatically overhauled if workers and retirees are to better prepare themselves to meet future retirement challenges. Recent economic events including the global ... More

Retirement risk management must be dramatically overhauled if workers and retirees are to better prepare themselves to meet future retirement challenges. Recent economic events including the global financial crisis have upended expectations about what pension and endowment fund managers can do. Employers and employees have found it difficult to make pension contributions, despite drops in retirement plan funding. In many countries, government social security systems are also facing insolvency. These factors, coupled with an aging population and rising longevity, are giving rise to serious questions about the future of retirement in America and around the world. This volume explores how workers and firms can reassess the risks associated with retirement saving and dissaving, to identify creative adjustments to adapt to these new risks and realities. One area explored is the key role for financial literacy and education programs. In addition, those acting as plan sponsors and fiduciaries must reconsider pension design to help them better address the new realities. Also novel financial products are described that can help retirement plan financing innovate. Experts provide new research and offer policy recommendations, illustrating how retirement plans can be amended to better meet the retirement needs of workers and firms. This volume will be a welcome addition to the libraries of everyone focused on retirement security.Less

Reshaping Retirement Security: Lessons from the Global Financial Crisis

Raimond Maurer, Olivia S. Mitchell, and Mark J. Warshawsky (eds)

The worldwide financial crisis has wrought deep changes in capital and labor markets, old-age retirement systems, and household retirement and consumption patterns. Around the world, plan sponsors, ... More

The worldwide financial crisis has wrought deep changes in capital and labor markets, old-age retirement systems, and household retirement and consumption patterns. Around the world, plan sponsors, fiduciaries, policymakers, and households have gained a new awareness of retirement risk. When pressed to reform postcrisis, many would recommend enhancing financial advice for plan participants, emphasizing flexibility and the positive effect of working another one or two years to make up for investment losses in the downturn. Adding to this is the continuing need for financial education, essential as the retirement system moves increasingly toward personal account pensions. But perhaps most important of all is the need for greater understanding of risk throughout the retirement security system, along with new approaches to reengineering retirement pensions.Less

Retirement System Risk Management: Implications of the New Regulatory Order

Olivia S. Mitchell, Raimond Maurer, and J. Michael Orszag (eds)

In the wake of the worst financial crisis since the Great Depression, lawmakers and regulators around the world have changed the playbook for how banks and other financial institutions must manage ... More

In the wake of the worst financial crisis since the Great Depression, lawmakers and regulators around the world have changed the playbook for how banks and other financial institutions must manage their risks and report their activities. The US Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act, and the European System of Financial Supervision (ESFS) is also crafting a framework to supervise regulated financial sector institutions including banks, insurers, pension funds, and asset managers. The implosion of the financial sector has also prompted calls for accounting changes from those seeking to better understand how assets and liabilities are reported. Initially banks were seen by many as the most important focus for regulatory reform, but other institutions are now attracting policymaker attention. There is logic to this in terms of managing systemic risk and ensuring a level playing field that avoids arbitrage between institutional structures. Yet the nature of pension and insurer liabilities is so different from that of bank liabilities that careful attention is needed in drafting appropriate rules. The new rules are having both direct and spill-over effects on retirement systems around the world. The first half of this volume undertakes an assessment of how global responses to the financial crisis are potentially altering how insurers, pension plan sponsors, and policymakers will manage risk in the decades to come. The second half evaluates developments in retirement saving and retirement products, to determine which and how these might help meet shortfalls in retirement provision.Less

Saving for Retirement: Intention, Context, and Behavior

Gordon L. Clark, Kendra Strauss, and Janelle Knox-Hayes

Understanding the ways in which people save for their retirement is an urgent issue. So much has changed in the last 10 to 15 years, especially in the area of the provision of pensions and retirement ... More

Understanding the ways in which people save for their retirement is an urgent issue. So much has changed in the last 10 to 15 years, especially in the area of the provision of pensions and retirement income. Around the world, greater and greater responsibility is being allocated to individuals while governments discount their contributions to social security and employers retreat from the provision of supplementary retirement income. In this book, we begin with the behavioral revolution and its implications for understanding financial decision-making and saving for the future. Recognizing the profound implications of this research program, we go beyond issues of risk aversion, framing, and decision-making to consider how social identity and the resources due to people by virtue of their place in society figure in savings behavior. We take seriously the context of environment in which people make financial decisions arguing that this allows us to better understand the coexistence of sophistication and naivety apparent in patterns of retirement saving. Utilizing databases from the United Kingdom, we give empirical life to our theoretical arguments demonstrating how an integrated approach to individual financial decision-making is necessary if we are to address the apparent shortfall in many people’s planning for the future. The book concludes by setting the agenda for the design, governance, and regulation of pension savings schemes consistent with delivering cost-effective solutions to pension adequacy. In these ways, our book is a manifesto for rethinking individual behavior as well as the design of retirement income systems.Less

Securing Lifelong Retirement Income: Global Annuity Markets and Policy

Noriyuki Takayama

Olivia S. Mitchell and John Piggott (eds)

Interest in longevity and longevity risk management is burgeoning, as government and regulatory agencies are increasingly conscious of the potential risks and benefits of longer life spans. ... More

Interest in longevity and longevity risk management is burgeoning, as government and regulatory agencies are increasingly conscious of the potential risks and benefits of longer life spans. Commercial and industrial organizations, especially within the financial sector, are awakening to the opportunities presented by population aging, along with the new array of financial insurance instruments to manage longevity risk which more sophisticated markets are making possible. This volume explores three main themes: the need for products to manage longevity risk, the structure and safety of financial products on the market that help manage longevity risk, and the role of policy in stimulating and strengthening longevity insurance products. The volume is international in purview, with coverage on emerging economies (India, Chile) along with many of the older nations (Sweden, Canada, the United States, Australia, Japan, the United Kingdom, and Switzerland). It evaluates the challenge posed by trends in longevity risk and draws out the implications and constraints of this new reality for insurance companies and annuity providers.Less