The Value for Money of Annuities in the UK: Theory, Experience and Policy

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1 The Value for Money of Annuities in the UK: Theory, Experience and Policy Mamta Murthi 1, J. Michael Orszag 2 and Peter R. Orszag 3 October Abstract: The UK requires individuals with individual pension accounts to annuitize before the age of 75. Using a time series of annuity prices and quantities, we apply the methodology of Mitchell et. al. (1999) to examine the value of UK market annuity rates relative to theoretical values. We find that selection effects account for the majority -- perhaps one-half to two-thirds -- of the total annuity costs for the typical individual. The pure administrative cost loadings on UK annuities are relatively low. While our results are sensitive to mortality assumptions, the total financial losses for the typical worker from charges or market imperfections in the annuities market appear much lower than the costs at the pre-retirement stage as found by Murthi, Orszag, and Orszag (1999). Keywords: annuities, money s worth ratios, adverse selection JEL Classification Nos.: H55, G2, G22 This paper is part of a wider World Bank sponsored study on annuities markets throughout the world. The authors wish to thank (without implicating) numerous reviewers and others who have provided us with information and comments. We would also like to thank Amy Finkelstein for extensive discussions. We are grateful to Investment Intelligence (a division of the Research Department) and Thesys Ltd. for the use of their data, and particularly Yvonne Murray of Thesys for numerous clarifications. 1 Clare Hall, Cambridge CB3 9AL, UK. 2 Department of Economics, Birkbeck College, London W1P 2LL. 3 Sebago Associates, 951 Old County Rd., Suite 194, Belmont, California Initial version: August

2 I. Introduction Annuitization is often perceived to be among the more difficult areas of social security privatisation and reform. For example, an issue brief in the World Bank s (1994) Averting the Old Age Crisis identified the core problems of adverse selection, mortality risk, and high commissions/misselling associated with private annuities markets. In addition to these core problems, other potential concerns include the yields on private annuities and the competitiveness of the private annuities market. In the UK, where annuity yields have been falling in tandem with interest rates for the past few years, there has been a growing demand for greater flexibility with respect to annuitization. Administrative costs of annuities have attracted less attention, perhaps because public policy has focused on the accumulation stage where the personal pension misselling episode has resulted in greater regulatory oversight of charges and the institution of compensation procedures for individuals who were missold pensions. As more personal pensions (and their successor stakeholder pensions) mature, the scrutiny of annuities markets is set to increase. The UK has a long history of mandatory annuitization of pension funds, dating back to the Finance Act of The Finance Act of 1956 introduced the current requirement of annuitization before age 75, which it applied to individual pension accounts for the self-employed (the annuities were known as Section 226 Retirement Annuities). In 1988, when a broader form of individual accounts known as personal pensions were introduced, the system became somewhat more complicated: The portion of an individual account funded by National Insurance Contribution (NIC) rebates must be fully annuitized, and the annuity must be purchased at some point between age 60 and age 75. The annuity payments must be the same for men and women for a given age of 5 For an overview of mandatory annuitization in the UK, see Oonagh McDonald,

3 annuitization: providers cannot provide lower annual payments to women to reflect their longer life expectancies. 6 The portion of an individual account funded by additional contributions does not have to be entirely annuitized. In particular, up to 25 percent of the accumulated balance from this component of the individual account can be withdrawn tax-free in a lump sum. If the account holder retires before the age of 75, 7 the rest of the account can be distributed in one of three ways: (1) an annuity purchased from a life insurance company, (2) an annuity purchased from the life insurance company providing the individual account, 8 or (3) an income drawdown facility, under which the retiree withdraws specific amounts of money while most of the balance continues to earn market returns. At 75, regardless of which option is initially chosen, the balance of the account must be converted into an annuity. 9 All pension annuity income is taxed as ordinary income. The tax-free lump sum may be used to purchase an immediate (or purchased life or voluntary ) annuity, under which annuity payments are split up into returns on capital and income for taxation purposes. Since capital is taxed at lower rates, particularly for those on lower income, voluntary annuities have particular tax advantages These protected rights annuities must now also be (RPI) index-linked up to a maximum of 5 percent and be underwritten on a joint life basis, even if the individual is not married. 7 Individuals designate a retirement age, normally required to be between 50 and 75, for their individual accounts. 8 In practice in the UK, the vast majority of personal pensions are underwritten through life insurance companies or vehicles, from whom individuals may also obtain their retirement annuity. 9 There are a wide variety of annuity types, including level annuities, which pay the same amount in pounds for the term of the annuity; unit-linked annuities, which pay an amount linked to stock prices for the term of the annuity; index-linked annuities, which pay an amount linked to the retail price index for the term of the annuity; and with-profits annuities, which pay an amount linked to the profits of the provider. Other choices include whether the annuity is single life or joint; minimum guarantee or not; and the frequency of payment (monthly, quarterly, annual, etc.). The annuities market thus presents a wide variety -- perhaps a bewildering variety -- of choices for retirees. 10 One anomaly is that impaired life annuities involve less proportional tax relief because capital amounts are the same as ordinary voluntary annuities but income is greater. 3

4 Workers do not have to begin receiving the two components of the individual account -- the part funded by NIC rebates, and the other part funded by additional contributions -- at the same time. If workers die before annuitizing their account, the balance of the account enters their estate. The other important point to note is that individuals are not required to annuitize their account with the financial provider from the accumulation stage: under the so-called open-market option, individuals are allowed to annuitize their account with any life insurance company. In summary, although the system is now more complicated, it still involves (in most cases) a requirement to annuitize before age 75. The UK s long experience with compulsory annuitization, along with the existence of inflation-indexed annuities that are less common or nonexistent in many other countries, provides a unique setting to investigate the operations of private annuities markets and derive policy lessons. This paper assesses the overall financial cost to the UK consumer of annuitizing his or her pension fund at retirement. 11 It examines costs for a range of annuity products, by age and gender, using different assumptions about future interest rates and mortality improvements. The annuities market in the UK has been the subject of recent study, particularly in the US on account of the on-going debate on the privatisation of Social Security. Brown, Mitchell and Poterba (1999) examine the UK market for index-linked annuities, while Finkelstein and Poterba (1999) compare the compulsory market with the voluntary market. Where relevant, we compare our findings with these other studies. The overall cost loading on an annuity for the typical individual can be thought of as comprising of two components: a selection cost and an administrative cost (Friedman and Warshawsky, 1990; Mitchell, Poterba, 11 In a related paper -- Murthi, Orszag and Orszag (1999) -- we examine the financial costs associated with the accumulation stage of personal pensions. 4

5 Warshawsky and Brown, 1999). Selection arises in the annuities market because people with longer-than-average life expectancies are more likely to purchase annuities, and more likely to purchase larger annuities, than people with shorter-than-average life expectancies. Given the mandatory annuitization rules in the UK, the selection effects occur both because of selection in who holds individual accounts during the accumulation phase and the timing of annuitization. The insurance companies that sell annuity policies consequently price them based on the longer life expectancies of the annuitants. A typical person with average life expectancy must therefore pay a higher price for an annuity than would be justified based on average life expectancy. The second component of annuity costs consists of the administrative costs the annuity provider bears; such costs cover expenses such as marketing, commissions to agents, investment costs, overhead, capital requirements and profits. It is worth making two points about selection in annuities markets. First, selection effects may arise both from socio-economic differentials in mortality as well as asymmetric information. To the extent that insurers in the UK rarely use socio-economic factors in pricing, the observed socioeconomic differentials could well be due to asymmetric information arising from the costs of verifying asset/income data accuracy. Therefore, it is debatable how much of the selection effects are due to adverse selection and how much are due to objective unpriced mortality differentials among risk classes. Second, selection costs are a financial loss only relative to the actuarially fair annuity for that typical individual; they should not be used to suggest that the annuitant suffers a utility loss, nor do they provide a metric of the social welfare losses from annuitization For further discussion of the expected utility of purchasing an annuity see Mitchell et. al. (1999). 5

6 Using the money s worth ratio (MWR) methodology of Mitchell, Poterba, Warshawsky and Brown (1999) -- we reach several conclusions: First, the overall annuity cost loading is roughly percent of the account value for the typical individual. That is, for a typical individual, we find that the annuity payments are about percent below what would be implied by anticipated population mortality and the current yield structure on riskless government bonds. We also find this figure has not changed much since Second, half to two-thirds of the overall cost loading is due to selection effects. The pure administrative cost loading on annuities is thus no more than 5 percent of the value of the account. Poterba and Warshawsky (1999) reach similar conclusions for the annuities market in the United States: they find that the majority of annuity costs is accounted for by selection rather than traditional cost loadings. Third, even with the selection costs, the overall costs at the annuitization stage are small relative to costs during the accumulation phase of a personal pension plan. In Murthi, Orszag and Orszag (1999), we decomposed charges over the lifetime of an individual in a personal pension in the UK and found that historically over the period since 1988, over 40 percent of an individual account's value is consumed by various charges and fees. The contribution of annuitization costs to the overall costs to an individual in the UK, however, was relatively very small. Costs during the accumulation phase were found to amount to around 36 percent of the accumulated balance. (Taking account of interaction effects, the combined accumulation-annuitization costs amounted to 43 percent.) The annuitization phase is thus significantly less costly than the accumulation phase, and would be even less costly if selection effects were reduced. 6

7 Empirical magnitudes are often in the eye of the beholder, and we do not intend to evaluate whether 10 percent (or even 5 percent) is high or low. But whatever the resolution of that semantic debate, it is clear that annuitization costs are significantly lower than accumulation costs in the UK. There are a variety of explanations for this: Sales commissions are low relative to other financial products. Annuities are commoditised, so it is easy for consumers or advisers to compare rates across products. The annuity amounts are relatively large, so customers have an incentive to search extensively. The lack of availability of fine-grained mortality data limits the ability of providers to cherry-pick customers. Economies of scale and other benefits to providers from attracting market share in a growing market reduce prices to consumers. For providers, annuities are a useful balance against life insurance liabilities -- so that they are willing to sell them at quite competitive prices. Once sold, annuities are relatively easy to administer -- and hence administrative costs are likely to be low. Pension annuities purchases in the UK are irreversible, so providers do not bear lapse risk. Our overall results, however, have a number of important caveats. Among these caveats are: First, our focus is on means, not distributions. Although we find the annuities market to have low costs relative to the accumulation phase for the typical worker, a large fraction of individuals may not be getting good money s worth on their annuity purchases. The paradox arises because relatively unsophisticated investors with small pension funds often do not 7

8 exercise their option to buy an annuity from the most competitive provider in the market. Second, a further problem relates to mortality assumptions. Mortality experience in the UK has been considerably lower than had been anticipated some years earlier. Ex post, companies may therefore experience significant losses on annuities even though, ex ante, they were expecting profits. 13 Indeed, the combination of low mortality and low interest rates has meant that UK life offices may lose 10 billion or more on guarantees on retirement annuity contracts and several life offices will have to (or have had to) put themselves up for sale as a result of the strain on their free assets. A rough analogy is with disability insurance in the US and the UK; insurers failed to predict morbidity trends accurately and as a result lost money. 14 Our results are quite sensitive to mortality assumptions. Money s worth values on a fully risk-adjusted basis are therefore higher than our risk-neutral calculations would suggest. These findings are discussed in more detail throughout the rest of the paper, which has the following structure. In the next section, we provide an overview of the UK pension annuities market and its evolution over time. Section 3 discusses the Mitchell, Poterba, Warshawsky and Brown (1999) framework that we use for our calculations. Section 4 describes our data and presents our results. A final section concludes. II. The Market for Pension Annuities in the UK The market for annuities in the UK is segmented into pension annuities and non-pension annuities. Pension annuities are divided into open market options (OMOs) and compulsory purchase annuities (CPAs). Compulsory 13 There are important incentive problems here in choice of mortality assumptions as ex ante insurers may also use over-optimistic mortality assumptions in order to boost apparent return to capital. 14 See Martin Werth, Capital Requirement for Protection Products, Munich Re, July

9 purchase annuities are typically purchased by members of occupational defined contribution schemes, 15 whereas open market options are typically purchased by those in personal pension schemes or by the self-employed (Sec. 226 Retirement Annuities). Non-pension annuities consist of voluntary annuities which, as noted above, can be purchased with the lump-sum distribution from a personal pension, or from additional voluntary savings that are not tax-advantaged. The voluntary market consists of both temporary and life annuities. The market for pensions annuities is larger than the market for non-pension annuities as seen below. The Association of British Insurers (ABI) collects data on aggregate annuity volumes. Fig. (1) reports gross annuity payments to individual pensioners, sponsored (or group) pensioners, and immediate/other (voluntary) annuitants. As can be seen, payments to individual and sponsored pensioners outweigh payments to voluntary annuitants. Sponsored pensioners, typically from occupational schemes, represent the bulk of annuity payments. Fig. (2) shows new annuity business written by insurance companies. As pension plans have matured and the population has aged, the volume of annuity business has risen. Pensions business dominates new business. In 1997, new pension annuities single premia was 4.3 billion whereas the life assurance sector as a whole had over 37 billion in UK new single premia and 4.2 billion in regular premia. To assess the relative size of the annuities market which is dominated by single premia, it is necessary to aggregate single and regular premia business; the typical procedure is to work with annual premia equivalents (APE) which equals regular premia plus single premia divided by 10. Using the APE measure, pension annuities were 15 Some complications arise with non-tax advantaged ( non-exempt ) top-up schemes for employees earnings over the earnings limit. For such schemes, employers may purchase a Hancock Annuity when the employee retires and the capital cost can be deducted by 9

10 about 5 percent of new business in On the other hand, pension business is over 60 percent of total new life assurance business in the UK. As a result, pension annuity business can be expected to grow substantially in the future. employers. Unlike other annuities in the UK, the Hancock can be commuted and may even be a lump sum (see Alec Ure, 1998, p for further details). 10

11 Fig. 1: Annuities in Payment (ABI statistics) Fig. 2 : New Annuity Business in m (ABI Statistics) Figures 1 and 2 exclude income drawdown, which was introduced in the Finance Act of 1995 because of low annuity yields. As noted above, income drawdown is possible upon retirement and up until age 75, at which 11

12 time the remaining balance must be annuitized. Income drawdown plans involve taking between 35 percent and 100 person of income, based on a standard annuity, and investing it during a deferral period before annuitization. Before the introduction of income drawdown, individuals had to annuitize in order to draw their pension. In 1997, there were roughly 1.5 billion in volume of income drawdown policies issued. The annuities market is somewhat concentrated. While there are no publicly available quantity data by company in the UK, we were able to piece together market share data using the regulatory returns of the insurance companies. 16 In 1997, the top 4 annuity companies had 63 percent of the market (for non-linked non-profit single premia annuities). By comparison in 1997, the market concentration of the top 4 insurance companies in terms of new premia for pension business was 34 percent and for overall life insurance business was 20 percent. To make comparisons from further afield, in the United States in 1992, the top 4 depository institutions held 13 percent of the market, the top 4 securities and commodities broker-dealers held 27 percent of the market, and the top 4 insurance carriers held 16 percent of the market. 17 In addition, the Herfindahl index for the UK annuities market in 1997 was , slightly above the 0.1 threshold viewed as critical by the Antitrust Division of the US Justice Department. 18 On the other hand, permanent health or income replacement insurance on disability in the UK is about as concentrated as the annuities market. Furthermore, data from the US Bureau of the Census show four-firm concentration ratios in the early 1980s in the same range, or higher, for many industries (e.g., 64 percent for primary aluminium, 66 percent for ties and 16 We used Form 47, Col. 3, Line 10 (Non-linked, non-profit single premium pension policies) for non-linked annuity policies. Analysis of many of the 1997 raw DTI returns of top companies suggested that this was a reasonable estimate. 17 U.S. Bureau of the Census, 1992 Economic Census, Table 6, Concentration by Largest Firms: 1992, available at 18 See, for example, Viscusi, Vernon, and Harrington, 1992, page

13 inner tubes, 85 percent for flat glass, and 86 percent for cereal breakfast foods). 19 Finally, more recent U.S. manufacturing data, from 1992, show Herfindahl indexes ranging from well under 0.01 to as high as 0.29, with many industries registering over Another feature of the annuities market is that concentration has remained roughly constant over time. The top 4 annuity writers in 1985 held 59 percent of total business, somewhat lower than the 1997 level of 63 percent, but the Herfindahl index was somewhat higher in 1985, at Despite the roughly steady level of concentration, there has been some movement in and out of the top spots. For example, Eagle Star was number 2 in 1985, number 15 in 1993 and, by 1997, had fallen to number 24 in terms of volume. The top volume writer in 1997 (Prudential, with over 20 percent of the market) rose to that position only after 1992/93. Another way of assessing competitiveness in the market is to look at the number of providers and the spread of rates. For a male 65 compulsory purchase annuity, we find that the ratio of the number 5 rate to the top rate is close to 95 percent and that until recently there have been about 30 companies in the market. Fig. 3 shows the evolution over time of this ratio and Fig. 4 shows the same data plotted with interest rates. The price dispersion across the top providers is relatively limited -- well under 5 percent on average. The lack of price dispersion could indicate either a competitive market in which individuals shop across providers, or a collusive market in which providers collectively maintain monopoly-type prices. The low pure cost loadings on annuities (as discussed below) is at least suggestive that the lack of price dispersion in the annuities market is of the former rather than latter type. 19 U.S. Bureau of the Census, 1982 Census of Manufactures, Concentration Ratios in Manufacturing (Washington, DC, 1986). It should be noted that these data apply to a finer level of industry definition (four digit SIC code level) than the annuities market. 13

14 20 U.S. Bureau of the Census, Concentration Ratios in Manufacturing, 1992 Census of Manufactures Report MC92-S-2, available at 14

15 Fig. 3: Ratio of fifth best to top rate for male 65 annuities (CPAs) Note: The quotes are based on a premium of 10,000 and exclude specialist annuities. On July 9, 1999, the ratio was just over 96 percent. Fig. 4. Male 65 annuity yields (CPAs) relative to interest rates III. Value for Money of Annuities: Theoretical Framework An annuity provides a stream of income until one's death in return for an initial premium. A standard way of evaluating the value for money of such a contract is to compare the expected present discounted value (EPDV) 15

16 of the future income stream with the initial premium paid. The ratio of the EPDV to the purchase price is known as the money's worth ratio (hereafter MWR). For an individual deciding on which type of annuity to buy, an annuity with a higher money's worth ratio provides greater value for money. In general, the money's worth ratio depends on purchase price, the size of the future income flow, the individual's subjective assessment of mortality risk, and his or her rate of time preference. More precisely, the EPDV of a single life annuity can be written as: EPDV = T t * t t= 1 j = 1 A St (1 ij) + where At is the payout at time t, St is the probability that the annuitant survives until time t, ij is the one-period rate of time preference at time j, and (1 + ij) is the discount factor at time t. 21 In the analysis that follows, we consider the EPDV from the perspective of the average individual (that is, the individual with the average life expectancy). The most straightforward component of this calculation is the annuity rate. Annuity rates are available from a number of annuity brokers and are widely quoted in the financial press. For survival probabilities, we consider an individual facing average mortality risk. As an average annuitant tends to live longer than an average member of the population, we examine the EPDV from the point of view of both the average person and the average annuitant. We make two alternative assumptions about the rate of time preference. We first use the term structure of short-term interest rates on UK government bonds. This approach takes the point of view of an individual whose alternative investment is risk-free government bonds. We then consider the term structure of interest rates on corporate bonds. This makes allowance for 21 It is fairly straightforward to extend this framework to other types of annuities, such as joint life annuities or those with a minimum guarantee. 16

17 the fact that annuity payments are not entirely risk-free (insurance companies may go under), and individuals may discount future income flows more heavily than the risk-free return on government assets. All the data used in the analysis are described in further detail in the next section. The EPDV to purchase price ratio, or the value for money of the annuity, would be equal to one if the annuity was actuarially fair. In practice, we are likely to observe ratios that are less than unity. In other words, for every of initial premium, the average individual can expect to receive less than one 's worth of future income. The difference is accounted for by a number of factors, including the administrative costs of insurance companies (including marketing, commissions to agents, investment costs, overhead, and capital requirements), company profits, and the costs of selection. We examine selection effects in further detail below. Value for money and selection As indicated, annuitants tend to have lower mortality than the rest of the population. From the point of view of insurance companies, long-lived individuals are a poor risk, and annuity rates reflect the fact that insurers are pooling mortality experience among a group that has higher survival chances than the population as a whole. In terms of value for money analysis presented above, the EPDV is likely to be lower if population survival rates are used in place of annuitant survival rates. It is not clear to what extent the difference in mortality experience is due to private information on the part of the annuitants as opposed to their income and wealth background. There are significant differentials in mortality by socio-economic class in the UK. Table 1 provides evidence on mortality by socio-economic class from the latest survey of health inequalities 17

18 in the UK. 22 During , men aged in classes I-II were nearly 40 percent less likely to die before reaching the age of 65 than men in classes IV- V. Although the mortality differential between these two classes declines at higher ages, the fall is gradual and the differential remains above 20 percent till the age of 85. Mortality among women displays similar differences by social class, however the magnitude of the differential is smaller than in the case of men. The report also points to widening inequalities over time, that is, a greater reduction in mortality among the higher social classes. If this were to continue into the future, we can expect greater mortality improvements for these classes than the population as a whole. In addition to mortality differences by class, there are features of the annuities markets in the UK that encourage higher mortality individuals to opt into separate risk categories. Insurers offer enhanced life annuities with better payouts for those with lower than normal life expectancy. 23 As more people take these annuities, the average life expectancy of the remaining pool rises. Individuals may also act on private information on their mortality prospects. Thus individuals who are sick, or have reason to believe they may not live long, may choose not to annuitize or to delay annuitization. In general, we would expect more limited scope for such behaviour in the 22 See Health Inequalities Decennial Supplement, Office for National Statistics, September The data are for England and Wales and cover the period Social class is assigned on the basis of occupational status (employee, self-employed, unemployed) and job sector, with women assigned the same class as their husbands. I is the highest class, V the lowest. For further discussion of class differentials in mortality among the British population, see Coleman and Salt, The seminal Whitehall studies on income and mortality experiences within the British Civil Service are discussed in Michael Marmot et. al., 1991, pages There are two types of enhancement, standard and individual. Standard enhancements apply to those who meet certain fixed criteria, such as smokers or diabetics. Individual enhancements may be offered on the basis of the insurance company's assessment of an individual's life expectancy. 18

19 compulsory (pensions) market 24 where there is less of an element of choice. As discussed previously, annuitization may be delayed (up to the age of 75) but not postponed indefinitely. Even so, individuals may act on private information in a number of ways. They may take a larger proportion of their benefits in the form of a lump sum at maturity (up to the specified legal maximum). Or they may opt for withdrawals from their pension fund (again subject to the legal maximum) until the age at which they can no longer put off annuitization. 25 Compared to the compulsory market, there is greater scope for acting on private information in the voluntary (immediate) market. As discussed previously, these may be purchased out of the tax-free lump sum. They may also be purchased voluntarily with savings that are not tax-advantaged (unlike pension savings). Table 2 presents information on the expected mortality of 65-year old males and females drawn from three different populations: the general population, the compulsory market, and the voluntary market. As we can see, the combination of socio-economic background and individual behaviour results in mortality expectations that are lower for the population of annuitants than for the general population. Immediate annuitants are, in general, expected to live longer than compulsory annuitants. Selection effects may also be evident in the size of the policy and the type of the annuity. Those who buy larger policies tend to live longer than those who buy smaller ones. This can be seen in Table 2, which presents expected mortality weighted both by lives (number of policies) and by amounts. Once again the relative contribution of socio-economic background and individual behaviour to this pattern is not clear. Richer individuals have 24 We use the term compulsory market to refer to both open market options and compulsory purchase annuities. 25 For further discussion of the individual's annuitization decision see Khorasanee, 1996, Milevsky, 1998, Kapur and Orszag,

20 higher pension savings. At the same time, private information may result in the decision to annuitize later from a smaller, drawn-down pension fund. In this paper we focus on the compulsory market, considering both single and joint life annuities, by age and sex. 26 We examine three types of annuities: level, escalating, and RPI-indexed annuities. A level annuity pays the same nominal sum until the end of the individual's life. Escalating annuities raise the payout at a fixed rate, usually once a year. Annuities that escalate at both 3 percent p.a. and 5 percent p.a. are common in the UK. RPIindexed annuities raise the amount in line with the retail price index, again usually once a year. Compared to level annuities, escalating and RPIindexed annuities provide greater value in the later years of life. Those who expect to live long might thus favour them. We also know that indexed annuities tend to be for larger amounts. Unfortunately, there are no annuitant tables by type of annuity that allow us to examine whether selection is significantly different in these three markets. Our main finding is that on average selection effects account for the majority of the reduction in value for money of annuities. As discussed in further detail below, roughly a half to two-thirds of the reduction in the value for money would appear to be accounted for by selection effects. IV. Value for Money of Annuities: Evidence from the UK Data 26 We ignore the issues of protected rights annuities by assuming the individual is contracted into SERPS. Because age-related SERPS rebates are capped at 9 percent, older individuals close to retirement tend to be contracted in so that there are not many people retiring today who need to purchase protected rights annuities. 20

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