The Pension Research Council
Book Title

The Pension Challenge: Risk Transfers and Retirement Income Security

Chapter 5: Integrating Payouts: Annuity Design and Public Pension Benefits in Mandatory Defined Contribution Plans
Suzanne Doyle and John Piggott
0-19-926691-3-05

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Abstract

Defined contribution (DC) style retirement systems have proliferated as partial or complete substitutes for mandatory social security, and they pose special challenges for the payout phase. Adverse selection in the voluntary annuities market, prudential considerations, and the implications of interactions between annuity payouts and first pillar type social welfare, all suggest that DC retirement systems require some government regulation regarding the nature of associated retirement benefits. This chapter focuses on the design of annuities and similar retirement income instruments, including interactions between annuity preference and underlying publicly provided safety net support. The authors find that with a minimum pension guarantee, the variable annuity is the most preferred of all the annuities, for a broad band of accumulation levels and degrees of risk aversion. Another broad finding is that inflation insured annuity products are popular, especially with the rich and risk-averse.