Implicit Trade-off in Replacement Rates : Consumer Preferences for Firms, Intermediaries, and Annuity Attributes

Lifetime annuities are insurance policies designed to protect the annuitant from longevity risk. However, the evidence suggests that annuitants also consider other risks involved. We analyze the choices of Chilean annuitants over ten years. A significant proportion of retirees select firms with better risk-ratings which offer lower payouts, suggesting a concern about the provider's default-risk. In addition, most retirees are willing to reduce their payouts by contracting guaranteed periods, protecting their heirs in case of early death. Moreover, the evidence suggests that willingness to pay for guaranteed periods was even greater when mandated survivor benefits were absent. We show that these findings can be explained by the effect of individual characteristics on the expected lifetime utility of the annuity. Our results support the claim that bequest motives play a crucial role in the demand for annuities and indicate that replacement rates are an incomplete assessment of pension systems performances