longevity experience and the policy of profit distribution between annuitants and shareholders.

4.72 Retiring workers participating in variable annuities should be encouraged to select providers with high profit participation rates, low operating costs, diversified investment portfolios, and a consistent record of sound performance. Focusing on recent past performance, which is often underscored by selling agents, is not sound practice since past returns are not good predictors of future performance.

4.73 Market regulators need to ensure that annuity providers follow transparent and consistent policies on the handling of operating costs and the distribution of profits between shareholders and annuitants. The rules should discourage the use of transfer pricing whereby financial services obtained from affiliated companies are billed at artificially high prices. In addition, profit distribution policies may be subject to minimum regulatory requirements. For instance, the profit sharing rate may be set at 90 or even 95 percent of annual profits. Annuity providers are compelled to absorb any negative profits but are allowed to recoup their losses in subsequent years before determining profits available for distribution.

4.74 Regulating the profit sharing rate introduces considerable rigidity in the system. A more flexible alternative is to allow annuity providers to determine their own profit distribution policies but to require a high level of transparency. A central register should be created to compile comparative data on a consistent and informative basis on the investment performance and bonus policies of different providers.

4.75 It is interesting to note that neither Denmark nor Sweden has a central register compiling performance data on a systematic basis. However, in both countries, the offer of variable annuities is based on broad collective labor agreements. Thus, representatives of workers and employers monitor the performance of providers and protect the interests of pensioners. In a system of non-employer-based individual accounts, a central register of performance data and an effective supervision of providers are indispensable.

4.76 Competition in the market for variable annuities where longevity risk is shared among annuitants may on occasion take a perverse form. In order to increase their market share and expand their business annuity providers with a preponderance of low-risk clients may decide to offer attractive terms to new clients with higher-risk characteristics, effectively forcing low-risk annuitants, i.e. individuals with short life expectancy, to share the higher longevity risk of high-risk annuitants and thus causing unfair transfers across different groups. Admittedly such marketing campaigns may not be easy to design and implement. But a more likely occurrence is a friendly or hostile merger of two providers with different risk profiles. When mergers take place or marketing policies undergo drastic change, annuitants should be allowed to switch to another provider within a specified period and without incurring any exit fees.

4.77 An important aspect of pricing regulation is the legal requirement in many European countries to use unisex mortality tables. This has potentially adverse effects on 42