Over time, traditional participating annuities have evolved into **escalating participating annuities** . A basic objective of these products is to offer guaranteed benefits that are targeted to grow at a stable rate and may thus be better able to maintain their value in real terms. The bonuses are calculated at a rate that aims to cover moderate inflation, are declared annually, and are then included in future guaranteed minimum benefits. However, the bonuses are not guaranteed before their declaration and may be suspended if financial performance is very weak, although providers adopt investment and bonus distribution policies that favor stable and predictable bonus policies. From time to time bonuses may reflect exceptional profits that may not be incorporated in the guaranteed benefits for future years. Escalating participating annuities are widely used in continental European countries, especially in Germany (where they are called dynamic participating annuities) and Denmark.<sup>8</sup> In Sweden, the traditional participating annuities offered by the Swedish Pensions Agency for the funded component of the public pension system have two distinct features. The provider assumes the investment and longevity risks for the guaranteed minimum payments, but for the nonguaranteed benefits, while the investment risk is borne by all annuitants, the longevity risk is shared among annuitants on an age cohort basis. In addition, the SPA does not use a smoothing mechanism but distributes 100 percent of the profits after deducting expenses, thus making them highly transparent. These are referred to in this paper as the **PPM traditional participating annuities** because when they were first offered the agency responsible for the management of the funded component of the public pension system was known as the PPM ( _Premiepensionsmyndigheten_ – or Premium Pension Authority).<sup>9</sup> The basic characteristic of the **standard unit-linked annuities** is that the investment risk is shared among annuitants but the longevity risk is assumed by the providers. A fixed charge for expenses and mortality risk is stipulated in the contract, while 100 percent of net income is distributed to annuitants. Unit-linked annuities are highly transparent and do not suffer from the controversies afflicting participating annuities. These annuities have been authorized throughout the United States and have over time evolved into the VAs (and VPAs) with guaranteed benefits. The providers assume both the longevity and investment risks for the guaranteed benefits. Standard unit-linked VPAs have been offered in many European and other countries for the past quarter of a century but the new US-style variable annuities were more recently introduced in several countries outside the United States.

**CREF unit-linked annuities** differ from the standard version in that both the investment and longevity risks are shared among annuitants, the latter reflecting the longevity experience of the pool of annuitants of each fund **.** Their name derives from the special contract that has been authorized in New York for the TIAA-CREF, an insurance and pension institution that has specialized in offering retirement products to staff in academic institutions.<sup>10</sup> CREF annuities

> 8 The German annuity market is examined in von Gaudecker and Weber (2004) and Kaschutzke and Maurer (2010), while the Danish market is discussed in Andersen and Skjodt (2007).

> 9 The PPM was created in 1994 but was merged into the Swedish Pensions Agency (SPA) in 2010. In addition to the participating annuity, a unit-linked product is also offered (see below and Annex B for more details).

> 10 Over the years, the scope of operations of the TIAA-CREF has expanded and now covers people working in the academic, medical, cultural and research fields. In addition, the status of the TIAA CREF has changed into that of a 'forprofit' institution offering products and services to the whole market and it is not clear how its policies and products will evolve in the future.

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