Supply Side Resistance to Lifetime Annuities

Abstract

The Annuity Puzzle is that lifetime annuities are not utilized in retirement as often as might be expected. The literature invariably provides demand side explanations: bequest motives, liquidity preferences, crowding out by social security and family insurance, unattractive investment returns, poor money’s worth particularly for those with lower life expectancies and solvency concerns. On closer examination, none of these are found to adequately explain the puzzle, so the accepted view has come to be that a considerable proportion is due to behavioural biases and misunderstandings.

Overcoming behavioural biases and misunderstandings is likely to require a significant advances in the provision of financial advice. The tension between ensuring that advice is both appropriate and affordable is widely recognised, with the current focus in Australia being on simplification and financial technology.

On the other hand, supply side limitations to alternative products have barely been explored; particularly the possibility that it too is due to behavioural biases and misunderstandings. There is evidence of general resistance to change that could be explained by the interests of trustees and advisors to increase the size of their funds under management, and fees. The paper concludes by identifying challenges to trustees, advisors, regulators and academics.

Keywords: Behavioural biases; misunderstanding; regulatory capture; perverse incentives

JEL Classification: G22, G28, G41