The choice between life annuity and unit-linked insurance

Transcription

1 ISF Report 2014:26 The choice between life annuity and unit-linked insurance Swedish Social Insurance Inspectorate Stockholm 2014 Inspektionen för socialförsäkringen Authors: Josefina Selin (project manager), Daniel Hallberg and Marcela Cohen Birman 1

2 Summary The Swedish Social Insurance Inspectorate (Inspektionen för socialförsäkringen, ISF) is an independent supervisory agency for the Swedish social insurance system. The objectives of the agency are to strengthen compliance with legislation and other statutes, and to improve the efficiency of the social insurance system through system supervision and efficiency analysis and evaluation. The ISF s work is mainly conducted on a project basis and is commissioned by the Government or initiated autonomously by the agency. This report has been commissioned by the Government. Background During the last decade, individuals in Sweden have become more involved in investment decisions when it comes to saving for retirement. A defined contribution plan called the Premium Pension System (PPS), which is a part of the mandatory Swedish public pension scheme, covers all employees and self-employed since July 2000, with yearly contributions equal to 2.5 percent of income. Within the system, future pensioners create their portfolio containing equities, bonds (or both), which are registered with the Swedish Pensions Agency. If an individual is inactive at entry and no choice is made, the contributions are invested in a specific state-managed default fund. Upon retirement and onwards, individuals can opt to keep the premium pension in funds (unit-linked insurance) or opt to change to a life annuity insurance. If an individual decides on unit-linked insurance for the premium pension savings, the individual will keep 2

3 the fund account after retirement and continue investing in mutual funds. If instead choosing life annuity insurance, the Swedish Pensions Agency will take over management of the pension savings. The individual will receive a guaranteed amount each month. If the Swedish Pensions Agency successfully manages the pension savings, the pensioner will receive, apart from the guaranteed amount, an additional amount. The additional amount is recalculated each year, and it may rise or fall. If life annuity insurance has been chosen once, it is not possible to switch back to unit-linked insurance. At the turn of 2009/2010, the Swedish Pensions Agency revised the design of the application form for public pensions in terms of the choice between life annuity insurance and unit-linked insurance. Up until 2009, the design of the application form had a configuration in which unit-linked insurance was the default. At the turn of 2009/2010 the default option was removed, and a new form was introduced, in which the individual had to select either unit-linked insurance or life annuity insurance. When the default option was removed, the proportion that chose life annuity insurance rose from around 10 to about 50 percent. In May 2011, the Swedish Pensions Agency opted to reinstate the former application form with the default option. It caused the proportion that chose life annuity insurance to drop to about the same levels as before the application form was changed. Objectives The report studies the choice between life annuity insurance and unitlinked insurance that pensioners are facing in connection with their initial withdrawal from the PPS. The report describes how pensioners perceive the information that is given concerning the two types of pension administration after retirement, life annuity insurance and unit-linked insurance. It also analyses what impact the information and the design of the application form have on the choice that pensioners make. Methods The study consists of both quantitative and qualitative methods. The analysis is based on documents, focus groups, a questionnaire, and register data. The focus groups consisted of a total of 32 people in four different groups. Issues raised in the focus groups generally 3

4 concerned how individuals view pensions, their knowledge about retirement issues, how they prepare for retirement, their views on unit-linked insurance and life annuity insurance, as well as their opinion on future configuration of pension information and application forms. The questionnaire was based on a randomly stratified sample of people born between 1945 and 1952, and was aimed at quantifying the results that emerged from the focus groups. In total, the questionnaire was answered by 693 respondents, giving a response rate of 49 percent. The econometric analysis used administrative register data from the Swedish Pensions Agency and Statistics Sweden. These data contain information about both the individual pension rights and asset portfolios, along with information about the funds included in the PPS, and individual background characteristics such as place of residence, marital status, income, education and wealth. The analysis was conducted on a 5 percent sample of all those who contributed to the PPS in and who began withdrawals of premium pensions during that period. Findings The study shows that the design of the application form has a significant impact on the choice of type of pension administration after retirement. Furthermore, individuals are affected differently by the design of the forms, which has been confirmed through previous studies. The analysis shows that people with relatively poorer perceived financial capabilities are more constrained by the default option (the unit-linked insurance). Facing a neutral choice, this group opts for life annuity insurance to a much greater extent than other groups, when choosing the type of pension administration. The results from the questionnaire and focus group interviews reveal that most people seem to prefer life annuity insurance and the characteristics associated with this type of insurance. The results also indicate that the majority opt for life annuity insurance, when the form did not have a default option. The results show that the information provided to pensioners when applying for public pension could be made clearer and should be more informative. 4

5 Conclusions One conclusion drawn is that the information for both current and future pensioners can be improved. Many people may be unaware of how the choice affects their future pension, simply because they have forgotten past investment decisions, or because they did not want to make active pension choices, or thought they did not have the ability to make pension choices. It is a particular problem for those who have a fund portfolio with relatively high risk. In order to overcome this problem, the study discusses the possibility of introducing a confirmation choice, where pension savers must verify their selected fund portfolio. Individuals who do not confirm previous fund selection will have their capital in the PPS automatically transferred to a state-managed fund with risk profile, adjusted to age. The report also discusses the possibility of replacing the default choice in the application form. This would imply that the default is a state-managed fund with low risk, instead of the current default choice. 5