The Chilean annuity market

Abstract

One important decision for a person near retirement pertains to how to begin the decumulation process. One option is to purchase an annuity that will give a stream of income for the length of purchaser's life but transfers the property of the funds to an insurance company. This product protects the retiree from longevity risk, but the decision to annuitize is irreversible. Another option is to choose a phased withdrawal in which the retiree not only keeps the control over the funds but also retains the longevity risk and bears the capital market risk associated with the rate of return of the investments. In Chapter 1, we review recent developments in the payout market for Chilean pensions, focusing particularly on the role of annuities, and illustrates what makes the payout market in Chile so different from those in other nations. In Chapter 2, we use data on retirees from the Chilean labor market to analyze the empirical determinants of who selects annuities at retirement under the national defined contribution scheme. We find that sales agents, knowledge about the pension system, and greater education are associated with higher annuitization probabilities. Also, we find that people in poor health are less likely to annuitize, which is supportive of the traditional view of adverse selection in the annuity market. Finally, we analyze the effects on annuity choices of the introduction of a Mínimum Pension Guarantee. In chapter 3, we generate a measure usmg dynamic programmmg technique, called Annuity Equivalent Wealth (AEW), in order to estímate the benefits of the existence of the annuity market. Then, we model the decision between purchasing an annuity or taking a phased withdrawal adding this estimator. In chapter 4 we present sorne policy analysis by analyzing the benefits of annuitization under changes in the fees charged by the pension fund administrators and changes in the minimum pension guarantee provided by the govemment.