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Regulating Withdrawals in Individual Account Systems

Regulating Withdrawals in Individual Account Systems. Jan Walliser The World Bank Africa Region, PREM4. Introduction. The withdrawal of retirement savings poses new challenges for policymakers: Traditional defined-benefit pension systems pay an income stream for life, called life annuity.

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Regulating Withdrawals in Individual Account Systems

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  1. Regulating Withdrawals in Individual Account Systems Jan Walliser The World Bank Africa Region, PREM4

  2. Introduction The withdrawal of retirement savings poses new challenges for policymakers: • Traditional defined-benefit pension systems pay an income stream for life, called life annuity. • Traditional systems insure survivors and protect against inflation risk. • Can the private market replace those insurance functions? • Whichregulations might be necessary?

  3. Typesof Annuities (1) • Method of payment • Single premium • Series of premium payments • Number of people covered • Individual annuity • Joint annuity • Joint and survivor annuity

  4. Typesof Annuities (2) • Waiting period for benefits to begin • Immediate annuity • Deferred annuity • Nature of payouts • Life annuity • Fixed-period certain annuity • Refund annuity • Payment for fixed period only

  5. Types of Annuities (3) • Variability of payouts • Fixed annuity • Participating annuity • Variable annuity

  6. Why Regulate Withdrawals? • Uninformed or myopic workers • Government income guarantees create moral hazard • Insurance market properties • Adverse selection • Guarantees for annuity payments

  7. Should Mandatory Withdrawals Be Annuities? • Only life annuities protect against life span uncertainty. • Phased withdrawals neither insure against life span uncertainty nor avoid adverse selection in the annuities market.

  8. How Much Mandatory Annuity Income? (1) • Size of mandatory annuity should depend on government’s income guarantee. • Income from mandatory withdrawals should remain above guaranteed income levels in the long run. • Funds exceeding those necessary to ensure incomes stream sufficiently above guaranteed level could be withdrawn in a lump sum.

  9. How Much Mandatory Annuity Income? (2) • Mandatory annuity could reduce problem of adverse selection but restricts adaptability of consumption stream.

  10. Which Types of Annuities? • Refund and period-certain annuities could increase adverse selection but they increase the attractiveness of annuitization. • Variable annuities can be very risky. • Mandatory annuities should offer protection against inflation. • Mandatory annuities should provide an income stream for survivors.

  11. When Should Be Annuitized? • Withdrawal age poses a portfolio risk: changing the portfolio at retirement requires disinvestment at one point in time • Allowing the delay of annuitization (such as in the UK) exacerbates adverse selection

  12. How Should Annuities Be Priced? (1) • Companies could separate the market by sex, marital status, income, health habits, forebears’ longevity, etc. • Separation could lead to conflict between privacy and informational demands of insurers. • Some may perceive market separation as discriminatory (different prices for men and women).

  13. How Should Annuities Be Priced? (2) • Prohibiting separation implies redistribution of resources, i.e. from • Men to women • Low-income people (with typically shorter life expectancy) to high-income people • Single to married people

  14. Regulating Annuity Insurers • Policymakers may decide to implicitly or explicitly guarantee the payments of private insurers. • Guarantees encourage private insurers to take more risk. • Avoiding overly risky choices of insurers may require limiting the portfolio choices of insurers.

  15. The Government as Annuity Provider? (1) • A single provider of a mandatory annuity could exploit economies of scale (group annuity). • Eliminating competition runs the risk of creating inefficiencies. • The government as single provider would likely offer implicit guarantees whose value is not incorporated in the price.

  16. The Government as Annuity Provider? (2) • Group annuities would have to limit the options regarding pricing and choice to achieve economies of scale.

  17. Conclusions (1) • Withdrawals from mandatory pension accounts should be regulated. • A portion of accumulated funds should be annuitized, protect against inflation and insure survivors; the remainder could be withdrawn in a lump sum.

  18. Conclusions (2) • Group annuities could lower costs but would likely restrict choices among annuity types and pricing policies. • Regulation should limit the government’s risk exposure from variable annuities and failing annuity companies.

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