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U.K. Annuity Rates, Money's Worth and Pension Replacement Ratios 1957–2002

Author

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  • Edmund Cannon

    (Centre for Research in Applied Macroeconomics, University of Bristol, UK)

  • Ian Tonks

    (Xfi Centre for Finance and Investment, University of Exeter, UK)

Abstract

This paper constructs a time series of annuity rates in the U.K. for 1957–2002, and examines the pricing of U.K. annuities, and the relationship between the accumulation and decumulation phases of a defined contribution pension scheme by focusing on the properties of the pension replacement ratio. The paper computes the money's worth of annuities over the sample period, and finds that on average the money's worth has been just less than unity, implying that annuities are fairly priced. Using data on annuity returns and the returns on other financial assets, the paper simulates replacement ratios, to build up a frequency distribution of the pension replacement ratio for a U.K. individual. These frequency distributions illustrate the risk in the pension replacement ratio faced by an individual who saves in a typical defined contribution pension scheme. The Geneva Papers on Risk and Insurance (2004) 29, 371–393. doi:10.1111/j.1468-0440.2004.00293.x

Suggested Citation

  • Edmund Cannon & Ian Tonks, 2004. "U.K. Annuity Rates, Money's Worth and Pension Replacement Ratios 1957–2002," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 29(3), pages 371-393, July.
    • Handle: RePEc:pal:gpprii:v:29:y:2004:i:3:p:371-393
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    Cited by:

    1. Sutcliffe, Charles, 2015. "Trading death: The implications of annuity replication for the annuity puzzle, arbitrage, speculation and portfolios," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 163-174.
    2. Mu, Huaizhong & Yang, Ao, 2022. "Calculation of the transition coefficient and moderate level of China's pension system unification," Finance Research Letters, Elsevier, vol. 49(C).
    3. Alexis DIRER & Rim ENNAJAR-SAYADI, 2016. "How Price Elastic is the Demand For Retirement Saving?," LEO Working Papers / DR LEO 2437, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.

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