An insight into annuities

Review

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Written by an employee of the International Monetary Fund, this 237-page book is aimed principally at policymakers and regulators in countries where mandatory pension provision based on "individual accounts" is being considered. However, the breadth of coverage of the subject matter will make it a valuable educational text for those studying the annuity market and social security reform.

The book starts impressively by considering the rationale for the whole-life annuity (essentially longevity insurance), while pointing out its drawbacks in terms of the loss of liquidity and the inability to provide bequests. A mathematical model is given in the appendix to demonstrate that annuitisation of at least part of the retirement wealth is optimal for a utility-maximising retiree. The actuarial formula used to price annuities is explained, and its results are compared with annuity prices actually quoted in the market.

The next chapter looks at the annuity business from the viewpoint of annuity providers, examining the problems of asset selection, mortality risk, adverse selection and expenses. The role of governments in facilitating a private annuity market by issuing a sufficient quantity of long-dated bonds is rightly emphasised.

The rest of the book is concerned with public policy issues such as: the regulation of annuity providers; the experience of individual account reform in various countries; the justification for restrictions on withdrawals from individual accounts; the case for and against public sector annuity provision; the taxation of annuity disbursements; and the means of educating citizens about annuity choices. The book concludes with a helpful chapter of conclusions and recommendations.

The only criticism I have of this very good book is that it focuses almost entirely on the distribution phase of individual accounts. This isn't really appropriate, as many of the public policy issues discussed are equally relevant to the accumulation phase. For example, the author rightly refers to the problem of inequity between generations caused by variations in annuity prices; but this problem is greatly magnified by variations in investment returns over the accumulated period. A further chapter on the pre-retirement investment of individual accounts would have been helpful.

- Zaki Khorasanee, Senior lecturer in actuarial science, Cass Business School

Title: Annuity markets and pension reform

Authors: George A. (Sandy) Mackenzie

Publisher: Cambridge University Press

Price: £29.85

ISBN: 0521846323.

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