Annuity markets and retirement security

The growing importance of defined contribution pension arrangements has dra wn increased attention to the means by which retired people draw down their assets. Current UK law requires annuitisation of at least a fraction of de fined contribution plan accumulations. Annuity markets have recently attrac ted some criticism with respect to pricing and the available range of produ ct options. This paper describes a key feature of voluntary annuity markets : the presence of 'adverse selection'. This is the tendency of annuitants t o live longer than non-annuitants, since individuals who know that they are likely to die soon do not purchase annuities. The paper presents informati on that quantifies the importance of adverse selection in the setting of pr ivate annuity prices and discusses the role of compulsory annuitisation req uirements in reducing it. Requiring individuals to participate in the annui ty market can reduce selection effects, at the cost of reducing individuals ' range of retirement income options.