Annuity Values in Defined Contribution Retirement Systems: Australia and Singapore Compared

Abstract

Annuities promise to play an increasingly important role in countries with national defined contribution retirement systems. In this article we examine life annuities in two countries, Singapore and Australia, each of which has a national mandatory pension program. Exploiting data on annuity pricing and purchase behaviour, we compare the money's worth of life annuity products across these two nations. Our results indicate that, after controlling on administrative loadings, there are important differences in measured adverse selection. Part of the explanation may be due to the different structures of the two countries' retirement systems.

Betting on a Long Life – the Role of Subjective Life Expectancy in the Demand for Private Pension Insurance of German Households

“…Most frequently studied are the markets in the US (Friedman and Warshawsky (1990) and Mitchell et al (1999)) and in the UK Poterba (2002, 2004)). Further examinations have been done for Germany (von Gaudecker and Weber (2004)), Australia (Doyle et al (2004)) and Singapore (Doyle et al (2004) and Fong (2002)), as well as for Canada, Chile, Israel and Switzerland (James and Song (2001)). McCarthy and Mitchell (forthcoming) and Rothschild (2009) also compare mortality tables of policyholders with those of the general population, but do not explicitly calculate the money's worth.…”

The private value of public pensions

“…For the US and Australia, Mitchell and McCarthy (2004) and Doyle et al (2004) report money's worth ratios above 0.8 and 0.9 respectively. Similarly, Cannon and Tonks (2004) put the money's worth of UK annuities above 0.9.…”

Longevity Insurance: A Missing Market

“…That adverse selection in a voluntary annuity market is a problem is not in dispute, although its extent is a subject of empirical investigation. By comparing the 'money's worth' of life annuities in two countries 10 , Doyle et al (2004) show that Australia's annuity market exhibits significantly more marked adverse selection than does Singapore's, where eligible Central Provident Fund (CPF) accumulations can be better invested in an annuity than in any available alternative. A standardised Australian male annuitant would only reap slightly more than 80 cents per $1 of annuity purchased, compared to 93 cents in Singapore.…”

“…Only small markets exist for these types of annuities, if at all. Indeed, only a very small fraction of Australian retiree funds under management stem from life annuities (Doyle et al 2004), and mandatory annuitisation has been so disliked in the United Kingdom that its removal has been seriously discussed by policy makers there.…”