individual data on retiring workers and would solicit quotes from participating institutions. Such a system would reduce the influence of brokers, lower the search costs of retiring workers, enhance the quality of information available to them, and ensure broad access to competitively prices annuities.

A necessary requirement of an effective regulation of marketing would be compliance with basic conduct rules, such as the "know-your-customer" rule and an adequate disclosure of the terms and conditions of different products. Because annuity products are highly complex as well as irreversible and nontransferable, there would also be a need for extensive training of agents and brokers. Licensing and training of brokers and financial advisers involved in the marketing of annuities would be essential for promoting good business conduct and preventing potential abuse of less informed consumers.

In addition to adequate training, brokers would need to pass a certification test as well as the standard "fit and proper" test. Licensed brokers must be legally obligated to represent their clients, must generate their income from commissions on the sale of annuities, and must not be permitted to accept volume-related remuneration from insurers. Since supervision of brokers and pension advisors can be costly and time consuming, support in enforcing codes of good practices from SROs are welcome. Some countries have felt the need to introduce harsher regulations, such as the imposition of regulated caps on broker commissions in Chile or the complete prohibition of the involvement of brokers in Colombia.

# **5.4 The Institutional Structure of Markets**

Another policy issue concerns the institutional structure of the market for retirement products. The main choice is between centralized provision through a single provider and provision through a decentralized competitive market. Centralized provision is usually channeled through a public entity although it could also in principle be based on a highly regulated private entity. The zero and first public pillars, where they exist, rely on centralized provision through a public agency. As they almost always involve the offer of inflation-indexed compulsory lifetime annuities, their products play a central part in the annuity markets of most countries. Denmark and Sweden among the countries covered in this book also use public agencies for the centralized offer of supplementary lifetime annuities.

Centralized provision has several potential advantages. It allows for a larger base of risk pooling, especially if annuitization is compulsory. It also benefits from scale economies and avoids the heavy marketing costs that are incurred by decentralized providers. The main disadvantages are the potentially weaker incentives for product innovation and operational efficiency that may result from compulsory participation and monopoly market positions.<sup>25</sup> With public ownership and/or extensive public regulation, there is also a high risk of extraneous interference in annuity pricing and asset management. Such

> 25 It should, however, be noted that, despite their weaker incentives, public entities have often taken the lead in product innovations. A good example is offered by the Danish ATP, which has been a leader in both product innovation and sophisticated asset management.

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