When switching is allowed, annuitants who are diagnosed with some serious illness will have an incentive to seek better terms from competing providers. However, in decentralized competitive markets, the right to switch may involve a high level of marketing costs, including payments to selling agents. Combined with the lower valuation of portable balances because of the adverse actuarial effect of switching, granting to annuitants the right to switch may well result in a lower overall level of annuity benefits. The centralization of longevity insurance, as discussed in Box 2, may overcome these problems but it implies a different approach to the organization of the annuity market.

# **The issue of unisex mortality tables**

An important aspect of pricing regulation is the legal requirement to use unisex mortality tables. This has potentially adverse effects on different providers and may distort marketing policies. In Poland, a compensation mechanism is provided to cope with the adverse effects of the compulsory use of unisex mortality tables. Annuity providers will be required to calculate their technical reserves both on gender-specific and on unisex mortality tables. A government agency will compute the factor that is needed to equate the total reserves under each calculation. Providers for which the reserves under genderspecific mortality tables are higher than the reserves calculated with unisex tables multiplied by the specified factor will receive a compensating transfer through the government agency from providers with the opposite result. Similar compensation mechanisms are likely to be used in Hungary and other CEE countries.

# **The regulation of marketing policies**

In principle, CEE countries require annuity providers to comply with acceptable conduct rules. In their different ways, all four countries propose the use of electronic quotations, either through public agencies, such as ZUS in Poland, or through annuity exchanges.

The benefits from using centralized quotation systems will depend on the types of annuities that will be offered. The benefits are likely to be greater in the case of annuities with relatively high initial payments that will resemble traditional fixed nominal annuities. If annuities with low initial payments are used, the benefits will be smaller since price dispersion will be more limited and annual bonuses will play a greater role in the purchasing decision of retiring workers. In this case, the creation of a central register with comprehensive and reliable data on long-term performance, profit sharing rules and levels of operating costs will be of much greater use.

The regulation of marketing policies will need to protect annuitants from the potential perverse marketing campaigns of annuity providers, which will be more likely in the case of annuities with low initial payments and a greater reliance on annual bonuses. When mergers or other drastic changes in marketing policies alter the risk profile of the business of different providers (see section 2. 6 above), annuitants should be allowed to switch providers within reasonable time limits and without incurring any explicit or implicit exit fees.

56