The no model model

– Entirely liberalised annuity service provision as a possibility?

We must begin by clarifying that the notion of “fully liberalised” annuity ser-vice is not quite precise, since in practice the annuity market, which operates with only minor restrictions, is also generally regarded as “fully” liberalised, and accordingly “full” liberalisation is also scalable. At one end of the scale is the annuity market that operates to all intents and purposes without regulation, while at the other end there is the “liberalised” annuity market, which operates with several, but very general rules.

The annuity market, which operates with only minor restrictions, can cer-tainly not be logically linked to the system of “mandatory” annuity, the basis of which is that the state requires citizens to continuously save a targeted and defined portion of their income during their active carrier for consumption in their old age. This requirement is based on the presumption that the vast ma-jority of citizens are short-sighted and undisciplined, and prefer current con-sumption to old age security, and this is the reason why a state that does not pose such a requirement would eventually be confronted with a large, low-income old-age population that ends up relying on social benefit. If this is what we presume of the citizens, if this is the reason for obliging them to

accumu-late, then this presumption is not in accordance with the regulation that permits them to do whatever they want with their money at the time of retirement, because it can be presumed that even at that time the majority would spend it in a short-sighted manner, meaning the original problem is reproduced. In other words, fully liberalised annuity provision is in fact the logical approach in lieu of a mandatory labour pension and mandatory pension savings. Such a pension system is also possible, meaning when there is no central pension system at all, or if there is just a basic pension that provides only a minimal service for everyone, and there are international examples of this and it also has many advocates, but the detailed analysis of this system is outside the scope of this book, as here we are dealing with possible models for the applica-tion of mandatorily accumulated capital.

So for mandatory savings, in the case of “fully liberalised” annuity service there is still a need for at least one rule: mandatory pension savings (or a man-datory fixed minimum portion of that) must be converted to an annuity.

Naturally this rule in itself is not sufficient, since the meaning of the word

“annuity” – as I have indicated – is relatively broad, it includes, for example, both life annuities and annuities certain. Since pensioners are more and more dependent on pension income as their age progresses, only the life-long life annuity is suitable as a mandatory annuity (i.e. temporary life annuity is inade-quate!). Consequently, this rule is worthy of further development: mandatory pension savings (or a mandatory fixed minimum portion of them) must be con-verted to life-long (but not necessarily immediately commencing) life annuity.

Yes, but if there exists such an absolutely minimum regulation, then it is almost certain that the legislator will find himself in a kind of “legislative spiral”, so it becomes unavoidable to further elaborate on what is meant by

“life-long life annuity”. This is because providers (who continue to serve the short-term interests of short-sighted consumers) will try to pay out the savings, or the highest possible portion of it, in a lump sum and within the shortest possible time to circumvent the aim of the regulations by sticking to them formally. This is possible e.g. by paying out the life-long annuity in decreasing amounts, for example at each payment they pay out 50% of the reserve to the client until the end of his/her life (though this very quickly decreases the “life annuity” to a nominal amount). So it is useful to add that life annuities must not be of decreasing amount, etc.

By making it mandatory, the state implicitly also takes responsibility, mean-ing it cannot allow irresponsible providers who steal the clients’ money or are later unable to pay the promised benefits to appear on the market,. This forces the state to restrict the range of possible providers, to supervise their activities and, by setting requirements on available capital, to make them able to provide the undertaken service.

The state can probably not avoid taking a stand on questions such as accord-ing to what criteria (e.g. age, gender, occupation, place of residence, size of assets, etc.) providers may differentiate between clients. In the European Un-ion for example it is currently forbidden to differentiate between genders, and no matter to what extent I regard this rule as disputable, one must take it into account.

It is also probable that the state must make some kind of statement concern-ing the indexconcern-ing of annuities: is it compulsory or not, and if so then what is it based on (rate of inflation, wage index, etc.)? If the state prescribes something with relation to this then it launches another spiral of legislation: can the lon-gevity risk be devolved to the client or not?; how can it be avoided (through more regulations) that the provider finds itself in a difficult financial situation as a result of an obligation for which the responsibility lies not with the pro-vider, but with the state, etc.?

The justification for a liberalised annuity service may be twofold; a “practi-cal” and an “ideologi“practi-cal” reason. According to the “practi“practi-cal” justification, letting the market develop the annuity service system saves the state from having to perform the legislative work. The “ideological” justification states that competing providers provide the best possible result for the client; compe-tition results in the best possible service for the client at the lowest possible price.

Serious counter-arguments can be raised against both justifications. All of the abovementioned counter-arguments contradict the “practical” justification, because if the state has an obligation with regard to the pension system, then the state inevitably gets into a spiral of legislation. The argument against the

“ideological” justification is the example of the Hungarian life insurance mar-ket (and probably many others), where expensive products that do not meet the clients’ needs have been offered for a long time by competing providers. The reason for that is obvious and it would clearly work similarly in the “liberal-ised annuity market”: in the case of liberal“liberal-ised annuity, service providers would do their best to include the highest possible costs in the premium of the product. This can be best achieved if they offer products that are incomparable with those of their competitors and overvalue the significance of the difference through advertising. So unregulated competition that extends too many param-eters in reality means less competition, because it exploits the low level of information available to clients. In the case of all goods, intensive competition means competition between standardised products at a central location, which is best symbolized by how the stock exchange operates. There would be no stock exchange without standardization, and accordingly the ideological argu-ment is built on a market vision that is contrary to the real operation of the market.

Altogether I think that the fully liberalised annuity service model is not com-patible with mandatory labour pensions and the system of mandatory pension savings; such a model can only operate in countries where the state does not impose any kind of obligation with relation to pension savings. Where such an obligation exists and this model is nevertheless applied, the expectations to-wards the state and the consequent regulatory spiral easily leads to a state of affairs in which we may begin with a fully liberalised annuity provision sys-tem, but will quickly end up with a haphazardly regulated annuity provision system. Therefore it is expedient to avoid this trap and to review the expecta-tions that can be made of a mandatory annuity-provision system, and to in-clude this within a well-considered regulatory system.