1. The Payout Phase For Pensions
Will Price
World Bank Pension Core Course
April 2013

2. The payout phase is a critical part of a pension system but
receives far too little attention. It is central to the ultimate
outcome of income security
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Economic and political
Environment
Overall Framework –
other pillars and key rules
Supervision
Market Structure, Entities
and Conduct
Efficiency
Sustainability
Security
Coverage
Adequacy
Pension System Features Ultimate Outcomes

3. Payout phase has many different potential products, rules and
institutions.
• Products
• Lump Sums
• Phased Withdrawals
• Annuities (of differing types)
• Most countries restrict lump sums to ensure minimum annuitization
• Need to have the right capital market and regulatory structure for some
types of payments
• Risks of deliver can be born by insurance companies, pension funds, the
government and arms length government bodies – all have to deal with
core risks of longevity
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4. 1997+25 years: IMSS DC Annuity Market starts (AFORE +
Gov MPG pays Ins Co. 2030 before many workers eligible
Invalidity & Occ Risk (IV+RT) AFORE balance, plus IMSS, plus Gov for MPG pays Ins Co annuity
ISSSTE Recognition Bond plus AFORE balance plus Gov MPG pay Ins Co annuity
Private Sector Insurance Companies supply annuities for IMSS + ISSSTE (DB Invalidity Pension
(IV+RT) (DC Retirement Pension -RCV), AFOREs offered Phased Withdrawals. Lump sums also taken.
Public sector (IMSS, ISSSTE and Government administers and pays for DB Bens (IV+RT +
RCV) part funded by part of the balances accumulated in AFOREs post 1997
1997 2007 2022 2030 2046 2052 2060
IV+RT IMSS under LSS73 - IMSS admin & Gov pays after AFORE balance
potentially new retirees until 2047 (1997 plus 48 year career to 65)
RCV IMSS 1973 Law - IMSS admin & Gov pays after AFORE balance used
RCV – ISSSTE – pre 2007ISSSTE admin and Gov pays after ISSSTE balance –
potentially until 2052 – 2007 and 45 year career to 60 (age of retirement in ISSSTE
rising from 51 in 2010 to 60 by 2028
Government pays basic poverty alleviation (e.g. 70 y Mas)
1997+25 years: AFOREs offer IMSS Phased Withdrawals
ISSSTE Recognition Bond plus AFORE balance – AFORE phased withdrawals
There are multiple – and often complex – mechanisms to payout
retirement income – as shown by this example of Mexico

5. There are a wide range of products and variations
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Risk Characteristics of Retirement Products for Pensioners
Protection offered Benefits provided
Longevity risk Investment risk Inflation riskRetirement product Bequest Liquidity
Fixed real life annuities Yes Yes Yes Limited No
Fixed nominal life annuities Yes Yes No Limited No
Escalating real life annuities Yes Yes Yes Plus
Escalating nominal life …...
….. ..annuities
Yes Yes Partial Limited No
Variable life annuities,
.guaranteed benefits
Yes Yes Possible Limited No
Variable life annuities, bonus
payments
Shared Shared Shared Limited No
Variable life annuities, unit
linked
Shared No No Limited No
Lifetime phased …. …. … ..
..withdrawals
No No Possible Yes No
Term annuities No Possible Possible Yes No
Lump sum No Possible Possible Yes Yes
Self-annuitization No Possible Possible Yes Yes

6. Regulation needs to determine who will provide any given product
Centralized provision as adopted in Denmark and Sweden
Advantages: Large risk pooling; Scale Economies; Risk sharing
Disadvantages: Political interference in annuity pricing possible; Political
interference in asset management
Decentralization as in Chile and UK also has risks and advantages
Using individual choice has the same issues during the accumulation phase
You can combine decentralized provision with auctions to tackle issues with sales
agents
Bulk auctions also a possibility
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7. There are a range of risks that are being transferred when
moving from accumulation to payout
Shortfall
Equities
Bonds
Insured
Liabilities
Before
Risk removed
Shortfall
Equities
   
Subset of liabilities typically targeted
Risk removed
Shortfall
Equities
Bonds    
Subset of liabilities typically targeted
Risk removed
Shortfall 1
   
Subset of liabilities typically targeted
1Shortfall paid either immediately or crystallised into a series of regular known payment
2 Diagram shows position just before issue of individual member policies
Source: LCP Pansion Buy-ins, Buy-outs and Longevity Swaps 2012
Full buy-out
Insurance
Policy
Insured
Liabilities
Pensioners Non-pensioners
 
 
Buy-in
Insurance
Policy
Interest
rate risk
Inflation
risk
Asset
risk
Longevity
risk
Longevity swap
Interest
rate risk
Inflation
risk
Asset
risk
Longevity
riskResidual
Liabilities
Insured
Liabilities
Pensioners Non-pensioners
 
Residual
Liabilities
Hedged
LiabilitiesBonds
Interest
rate risk
Inflation
risk
Asset
risk
Longevity
risk
Pensioners Non-pensioners

8. The Chilean’s pioneered an auction approach

9. Mexico has also established an auction platform

10. The ‘value’ of an annuity can be compared using a Money’s
Worth Ratio – with care to ensure they are properly constructed
Money's Worth Ratios in Selected Countries Computed with Cohort Annuitant Table and Risk-Rate
Australia Canada Switzerland UK 1 UK UK 2 UK 3
(James) (James) (James) (James) (Cannon) (James) (Brown)
Nominal Annuities
Male, Age 55 - - - - - 0.921 0.934
Male, Age 65 1.013 0.981 1.046 - 0.977 0.908 0.927
Female, Age 55 - - - - - 0.928 0.937
Female, Age 65 1.002 0.976 1.036 - 0.979 0.907 0.927
Joint 0.988 0.98 0.985 0.981 0.987 - 0.929
Indexed Annuities
Male, Age 55 - - - - - 0.867 -
Male, Age 65 - - - - 0.887 0.854 0.822
Female, Age 55 - - - - - 0.876 -
Female, Age 65 - - - - 0.877 0.857 0.782
Joint - - - - 0.88 - -
Rocha and Thorburn (200&) citing various sources
Notes: 1 Cannon and Tonk's estimate is the overall average, 2 for males 60 and 65 and females 60 and 65; 3 MWR
for indexed annuities in the U.S. relate to annuities offered by Irish Life of North America (ILONA), which have
never been sold

11. Regulation of Providers has wide range of
considerations
• Prudential rules – insurance based options like Solvency II but
modern risk based solvency capital can be difficult
• Who and how do you choose allocation of risk
• Investment allocation rules
• Risk based supervision
• Availability of capital market instruments

12. Conclusion
• Payout is fundamental – needs to be tackled urgently
• Can’t say what you pension system is trying to achieve without
setting out pay out phase
• Need to chose type of product –annuities only product that
guarantees income till death
• Type of institution
• Type of regulation
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13. Will Price
willprice@worldbank.org
www.worldbank.org/nbfi/pensionfunds
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