A crucial – and often overlooked – element of any retirement system is the mechanism by which accumulated savings are used to provide an income after retirement. Over the last 30 years, there has been a steady retreat away from defined benefit-type (DB) systems, which pay a defined income on retirement, towards defined contribution-type (DC) systems, which do not. As these DC systems mature, developing and structuring markets that provide retirement income is becoming increasingly important.
This volume provides a timely and elegant international summary of this issue. Rather than focusing on individual topics, the editors present individual chapters by specialists from 10 countries describing the current market in retirement income in each country. The selection of countries covers a broad spectrum of size, financial market development and pension system type. This book is essential reading for policy-makers trying to obtain an international context into which they can place their own retirement income market, and for academics who are looking for an introduction to retirement-income markets and the prominent researchers in this field.
After reading this book, it becomes painfully clear that there is little international agreement on how to provide a retirement income. Instead, there is a wide variety of different models of the decumulation phase. Some countries (the US and Australia) impose no restrictions on how individuals may use their accumulated retirement savings. Others (Chile, Sweden, Switzerland and the UK until 2011) restrict individual options at retirement quite dramatically, although there appears to be little uniformity on the types of restrictions that are imposed.
Some broad themes, though, do emerge from the volume. Most importantly, the structure of the decumulation market appears to depend crucially on the legislative policy framework in each country, encompassing areas far beyond pension policy. The design of taxation and benefit systems, the regulation and stage of development of bond markets, and the regulation of insurance markets (both prudential and market conduct) all appear to play an important role in ensuring an effective market in retirement-income products. The resulting complexity is a great challenge for policy-makers in particular, and may be one reason underlying the lack of effectively functioning markets in many countries.
Further, after reading the volume it becomes clear that there is a great paradox in the retirement income markets of many countries. Most pension systems, as an institution, appear to have many features designed to surmount behavioural difficulties that individuals may have with saving, and to achieve economies of scale on their behalf. For instance, the pension participation decision is often automated; individuals are not required to obtain financial advice; contributions are paid before salaries are received; investment choices are limited or made by others; assets are invested in bulk; tax incentives are given to participate, and pension savings often cannot be accessed before a certain age is reached.
Yet the same philosophy does not often appear to extend to the decumulation phase. After a lifetime of participating in largely automated savings vehicles, in many countries, individuals are left to the retail market. Here, they must make complex decisions with the largest financial asset they have ever owned, often for the first time in their lives. This is true even if the underlying product – phased withdrawal – is quite simple. Charges – related to investment management and financial advice – may be high, and errors may only become apparent after many years, when they may be impossible to rectify. Most people struggle with financial decisions, but many older people, in particular, will need substantial assistance in managing their financial affairs as their cognitive abilities inevitably decline.
For all the focus in the volume on product development and market structure, this appears to be the greatest challenge in retirement income markets: ensuring that retired individuals are equipped to make the complex decisions that DC pension systems require in a cost-effective way.
A country highlighted in this volume where this challenge appears to have been may be Chile. While insurance companies there may lack the types of assets that their peers in more developed countries use to back annuity-type liabilities, the market in conventional life annuities appears functional and a surprisingly large proportion of retiring individuals voluntarily choose to purchase them. One reason may be that the Chilean government heavily restricts income draw-down products, and, possibly crucially, these are administered by pension funds rather than by specialist companies such as life insurers or asset managers.
Overall, this volume indicates that there is a great deal of work yet to be done in the annuities arena – both by academics and by policy-makers.
Academics need to provide a conceptual model of the decumulation phase that can be used as a benchmark to assess individual countries. They also need to provide unbiased and critical research on the effectiveness of individual policy interventions in enhancing individual welfare, focusing on issues such as the expense and effectiveness of financial advice, the welfare costs and benefits of product standardization, and on product design.
Policy-makers, on the other hand, need to rise to the challenge of co-ordinating the various regulatory agencies and policies which bear on retirement income markets, and build institutions that provide retired people with the security and flexibility that they require in retirement. In this area, this book shows that their input is absolutely crucial.
While this volume is an excellent summary of international practice, it missed the opportunity to incorporate some recent developments that are essential reading for policy-makers. The chapter on the United Kingdom, for instance, fails to even hint that their policy of mandatory annuitisation was under review in 2010 and abandoned in April 2011. Further, while new products – such as Group Self-Annuitised products and Variable Payout Annuities – are mentioned by individual authors, it would have been helpful to include a chapter specifically on these. Their most interesting feature is that they share risk between annuitants and insurers in flexible ways, potentially dramatically improving welfare.
Despite these minor shortcomings, the book will be indispensable reading for its target audience. The editors and chapter authors are to be congratulated on producing a valuable resource which will undoubtedly be closely read in many countries in the future.
