up to 10 years.<sup>18</sup> This is because in the early years of retirement survival probabilities are very close to unity.<sup>19</sup> Annuities with guaranteed periods of payment are effectively a combination of term annuities (for the period of the guarantee) and deferred annuities (starting after the end of the guarantee period). The wide popularity of annuities with guaranteed periods of payment suggests that the operation of deferred annuities, which is advocated by a growing number of observers (Milevsky 2005, Antolin 2008), will not face insuperable problems. Offering deferred annuities will deprive annuity providers of the profits they would make on the term annuity part of traditional products. This will imply a need for adding a margin in their pricing and underwriting models but will not weaken the case for promoting deferred annuities to provide protection to pensioners in advanced old age.

# **2.3.1    Default Options and Transparency**

Mandating the use of a single retirement product for all retiring workers has the advantage of simplicity. However, it runs the risk of imposing suboptimal solutions on those retirees whose risk preferences and financial circumstances may favor a different type of product. Offering a constrained choice of retirement products avoids this problem but faces a major challenge. How can retiring workers with limited financial expertise and poor understanding of the merits and drawbacks of complex products make rational and timely decisions?

The authorities can help in three ways. Firstly, they can improve transparency and disclosure by preparing pamphlets and other guidance material that explain in detail the characteristics, advantages, costs and risks of different products. They may consider undertaking regular programs to expand financial literacy.

Secondly, the authorities should compile comprehensive databases of the prospects of different retirement products and the performance of different providers. The collection of data on annuities and other types of retirement products is very limited in most countries. Denmark and Sweden are notable for failing to collect any data on the distribution and performance of different types of retirement products, despite the preponderant use of variable annuities. A mitigating factor in both Denmark and Sweden is that annuity contracts are based on collective labor agreements where representatives of employers and workers monitor the performance of annuity providers. In other highincome countries the limited collection of data is explained by the poor state of development of the national annuity markets.

Chile is a notable exception. It has a very rich database of life annuities and has also introduced a centralized electronic quotation system. However, even in Chile the

> 18 The same analysis of UK FSA annuity quotations shows that single annuities with 10-year guaranteed periods of payment lower monthly payments by slightly less than 2 percent compared to payments under single annuities with no guaranteed period (Annex A).

> 19 Data from the US show that the one-year survival probability of annuitants is 98.98 percent at age 65 and 97.02 percent at age 75 (Poterba 2009).

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