19 As individuals can claim means-tested additional benefits from the AHV/AVS in case of insufficient retirement income, the capital option constitutes a risk for the first pillar.

2. The problem of adverse selection if individuals with a low expected return from an annuity are more likely to withdraw their old-age capital as a lump sum, leaving the funds with the annuity obligations of the long-lived. The adverse selection problem affects the pension funds directly.

There are no conditions on the level of the remaining annuity benefits (including survivor benefits) when the capital is withdrawn as a lump-sum. The pension funds do not seem to put any restrictions in general, which is not surprising given the fact that the shortfall risk lies with the public pension scheme and not with the occupational pension provider. For withdrawals within the 25 percent limit as specified by the law, there is little concern to allow the lump-sum option. However, many pension funds, in particular those of small companies allow the entire capital to be withdrawn upon retirement. In these cases, there is a considerable risk to deplete the available resources too quickly, which constitutes an even greater risk for surviving spouses. While there are no representative studies that estimate the fraction of people choosing the lump sum, it is not uncommon that a large fraction of retirees in some companies withdraw the whole pension capital upon retirement. Our own data, as well as preliminary results from the pension fund statistics, suggest that approximately 20 percent of retirees choose the lump sum, with huge differences across pension funds<sup>16</sup> .

In reality, the second potential problem, the adverse selection, does not seem to represent a threat to the pension funds. This is pretty surprising given the fact that there are sizeable differences in MWRs across different subgroups of the population. For example, one would expect single men to opt for the lump sum much more often than married men due to a lower expected annuity return caused by higher than average mortality rates and the absence of survivor benefits. In the data, this does not seem to be the case, as is reported in Bütler & Teppa (2005). The most striking outcome is that single men are as likely to choose the annuity as married men, although in many cases they get a worse deal from an annuity compared to married men. One can only speculate as to why this is the case. The absence of family ties may be a factor. Single men may attach greater value to the longevity insurance provided by the annuity; in contrast, married men may place greater value to the bequest motive and thus opt for partial lump sums to a greater extent than single men. The fact that annuities from the mandatory pillar are offered at highly advantageous terms may explain the relatively limited use of lump sums by all participants. For women the picture is a bit different (but adverse selection effects are also much smaller due to the smaller differences in survival rates between different marital status). Married women are more likely to opt for the capital option, presumably because they are the second earner in the family and they already benefit from a high degree of annuitization stemming from the primary earner.

> 16 When collecting the data for the paper “The Choice Between an Annuity and a Lump Sum” (Bütler & Teppa, 2005) a number of pension funds had to be excluded for the lack of sufficient variability with respect to the capital option. A number of pension fund managers reported that virtually all retirees would choose the lump sum, others that the capital option was very uncommon.