Removing the Legal Impediments to Offering Lifetime Annuities in U.S. Pension Plans Professor Jon Forman University of Oklahoma College of Law for The Law and Society Association Annual Meeting New Orleans, Louisiana June 3,

Longevity Risk Risk of outliving your retirement savings 65-year-old man: 50% chance of living to 82; 20% chance of living to year-old woman: 50% chance of living to 85; 20% chance of living to year-old couple: 50% chance that at least one will live to age 88; 30% chance that at least one will live to 92 2

Sources of Retirement Income 48.6 million retirees in 2014 – 66.4 million in 2025 – 82.1 million in 2040 Social Security Pensions and IRAs Annuities Freestanding savings Houses (e.g., reverse mortgages) 3

Social Security – Inflation-adjusted pension benefits – 40.2 million retirees – $1344 per month, average benefit Supplemental Security Income – 2.1 million elderly beneficiaries – $435 per month, average benefit 4

$27 Trillion Retirement Savings $11.3 trillion in defined benefit plans $6.3 trillion in defined contribution plans $7.4 trillion in Individual Retirement Accounts (IRAs) $2.3 trillion in annuities 5

Voluntary Pension System At any point in time, only about half of American workers have a pension Traditional Pensions pay out as annuities – Lump sums often available – Shift from defined benefit (DB) pensions to defined contribution (DC) plans DC plans pay lump sums – Annuities rarely offered & rarely selected Individuals & IRAs rarely buy annuities 6

Annuities in DB Plans Default benefit is a lifetime pension – In the form of an annuity – Qualified joint-and-survivor annuity (QJSA) When a lump sum alternative is offered – Value equal to the actuarially-determined present value of the participant’s expected stream of lifetime pension benefits Fiduciary decision PBGC guarantees up to $60,136 per year 7

De-risking Standard Terminations Pension Risk Transfers – Lumps sum risk transfers – Insurance annuity risk transfers Lump sums – Inherently less valuable than a lifetime pension – Tend to be dissipated 8

Annuities in DC Plans DC plan may offer annuities among its investment options DC plan may offer annuities at retirement or job separation Fiduciary function to select and monitor DC participants can usually take a lump sum distribution (or roll over to an IRA) & later buy an annuity 9

IRAs & Annuities Individuals & IRAs can buy annuities from insurance companies E.g., $100,000 would get a 65-year-old man $6540 a year for life (6.54%) State insurance departments regulate – State-based guarantee funds – Usually $250,000 protection – Companies cannot advertise the guarantees 10

The Role for Annuities Low demand: the annuity “puzzle” Individuals underestimate their life expectancies; overvalue their wealth Retail annuities are overpriced – 12% load – Life expectancy varies with income & class Deferred income annuities – $100,000 now would get a 65-year-old man $25,000 a year starting at age 85 11

Other Countries Netherlands—pension benefits must be paid out in the form of an inflation-adjusted annuity to qualify for tax benefits Switzerland—80% converted to annuities Chile—70% choose lifetime annuitization of their public pension benefits (over the phased-withdrawal alternative) Australia—hardly any annuities 12

Other Countries United Kingdom – Stopped requiring retirees to buy annuities – Now allows current annuity holders to sell – Raises lots of revenue Trend towards choices about how to manage your retirement savings – even if those choices result in less annuitization – & more impoverished octogenerians 13

Best Ideas and Recommendations Other countries offer ways to – Increase participants’ knowledge and understanding of their spend-down options – Make it harder for financial advisers to charge high commissions or offer inappropriate investment advice – Incentives and withdrawal rules – Rely on insurance regulators instead of fiduciary duties 14

Increase & Preserve Retirement Savings Encourage workers to save more – Defaults & mandates Help participants get better rates of return – Keep fees low – Encourage better investments – Enforce high fiduciary standards Encourage individuals to work longer – Raise Social Security ages (62, 67, 70) – Raise pension ages (59½, 65, 70½) 15

Increase and Preserve Retirement Savings Preserve benefits until retirement – E.g., discourage early withdrawals and loans – Discourage rollovers Revise the rules for calculating lump sums – Use the latest mortality tables – Use the latest interest rates – Notices should explain how hard it is to invest a lump sum to get lifetime income 16

Tax Incentives Should Favor Lifetime Income Favorable tax rules should encourage the election of lifetime income streams – Inside buildup – Reconsider how & when annuity investments will be recovered Allow loss deductions for deferred income annuities 17

Improve Annuity Markets Promote annuities – Mandate annuitization? – Encourage annuitization Require plans to offer annuities Default participants into annuities Encourage plans to offer partial annuitization Promote education about annuities – More extensive lifetime income calculators – Fiduciary safe harbors for employer advice 18

Improve Annuity Markets Strengthen the market for annuities – Strengthen the guarantee funds – Federal insurance company charters – Governments could guarantee or sell annuities Allow more lifetime income products – especially products that pool participant risk Defined ambition plans (Netherlands) Tontine pensions 19

Conclusion Change the U.S. laws and regulations governing pensions & annuities – To make voluntary annuitization more attractive – To get pension plans to offer more annuity options & to encourage employees to select those options 20

About the Author Jonathan Barry Forman is the Alfred P. Murrah Professor of Law at the University of Oklahoma College of Law. He is the author of: – Tontine Pensions, 163(3) U NIVERSITY OF P ENNSYLVANIA L AW R EVIEW 755 (2015) (with Michael J. Sabin), & – M AKING A MERICA W ORK (Urban Institute Press, 2006) Jon can be reached at ; 21