Auctioning annuities

March 2021

What makes a market for annuity contracts successful, and what are the key demand and supply constraints that affect the performance of such a market?

Summary

In many countries, questions about the structure of annuity markets are becoming increasingly important subjects of policy debates, particularly as pension reforms promote public-private partnerships as a way to improve the financial security of retiring workers. Using data on annuity contracts from Chile, this paper examines an imperfectly competitive market where firms have private information about their annuitization costs.

Key Insights

Retirees’ information processing costs and the weights they assign to firms’ risk ratings in choosing an annuity contract increase with their savings.

Close to 50% of retirees are unconcerned about leaving a bequest, but the remaining 50% exhibit a strong preference to do so that increases with savings.

When annuitization costs are commonly known to all firms, pensions for retirees increase, but the gain accrues almost entirely to those with higher savings.

Using both English auctions and “shutting-down" risk ratings leads to higher pensions in equilibrium, but only for high savers.

Methodology

The authors used rich and unique data on over a decade of annuity contracts bought and sold in Chile from 2007 to 2018. Chile is one of the first countries to use a public-private system to provide annuity pensions to its retirees.

Most countries have social security programs designed to enhance retirees’ financial security, and these programs are under enormous pressure to remain solvent and viable.