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State Street: Mandatory Annuitization Comes with Risks

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Efforts in other countries to help workers turn savings into streams of guaranteed retirement income have run into problems during the Great Recession.

Analysts at State Street Corp., Boston, a money manager, discuss other countries’ experiences with mandatory retirement savings annuitization programs in a report on the life insurance market.

The U.S. Department of Labor and other federal departments and agencies have been talking about the possibility of creating new types of annuitization options or requirements to help participants in 401(k) plans and other defined contribution retirement plans make their savings last through retirement.

In some countries, the Great Recession has caused problems both for income annuityAnnuity clock performance and for access to safe guaranteed products, the analysts say.

The United Kingdom, for example, has had a compulsory annuitization program that has required defined contribution plan participants and holders of individual retirement savings products to roll their assets into annuities by the time they were 75.

“In 2009, annuity rates fell due to the financial crisis, causing pensioners who purchased annuities to accept the risk of receiving only half the income they might have otherwise expected from an annuity in previous years,” the analysts say.

Now, a new U.K. government has decided to end the annuitization requirement, the analysts say.

In other markets, the companies that once backed insurance-wrapped retirement investments have backed away due to the challenging market conditions, the analysts say.

“Hence,” the analysts predict, “the next frontier for innovation will be in translating lump-sum retirement savings into income while also addressing longevity risk.”

Meanwhile, “there are signs that capital intensive products, such as old-style annuities, may be on the way out,” the analysts say. “In some markets, this shift is already happening.”

- Allison Bell


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