EUROPE - The role of inflation-indexed annuity products in financing pensions should be carefully considered during the process of reformation of European pension plans, according to Olivia Mitchell, a professor and executive director of the Pension Research Council of The Wharton School at the University of Pennsylvania.

“ Protecting economic security during a long retirement period requires more attention to the long-term consequences of regulatory, financial, and social insurance programs that has theretofore been noted by most reformers,” says Mitchell.
“ New financial products to help retirees draw down their lifetime savings more sensibly would be helpful, but with them arise new challenges for financial system and insurance regulators.”

In her research paper, Developments in Decumulation, she says that annuity products play an important role in personal asset management into retirement, and that even risk averse people would value annuities at above their purchase price.

Commenting on Mitchell’s paper, David Blake, professor of financial economics at Birkbeck University, London, says: “ The life annuity is the only financial contract in existence that provides retirement income security for however long the plan member lives.”

Blake also says that an annuity is an essential part of a defined contribution (DC) pension plan, and without one, DC plans are just asset accumulation accounts with tax exemptions. According to him, Ireland, the Netherlands and the UK are the only countries in the world with DC plans that are actually pension schemes because of the fact that they include an annuity purchase at some point during retirement.

Blake comments: “ The size of the UK pension annuity market is £6bn (e9.8bn) per annum. In contrast the size of the US pension annuity market is just $2bn (e2.4bn) per annum, less than one-quarter the size of the UK market and the US is the world’s largest market for DC ‘pension’ plans: more than half of US workers and nearly half of US pension assets are in DC plans.”