SOME CLARITY ON THE ACCRUAL OF LIVING ANNUITIES AT DEATH OR DIVORCE CM v EM (1086/2018) [2020] ZASCA 48; [2020] 3 All SA 1 (SCA); 2020 (5) SA 49 (SCA) (5 May 2020)

A conventional life annuity is a contract in terms whereof an annuity underwriter guarantees a periodical payment to an insured in exchange for an initial non-refundable premium. The insurer pools all the annuity premiums together and assumes both the investment performance and the mortality risk by way of actuarial comparisons. The annuitant’s income is guaranteed for life or for a minimum period.Living annuities on the other hand are regulated by the Long-Term Insurance Act 52 of 1998 and are market-linked investments (with no income guarantee) in respect of which the annuitant annually chooses the drawdown rate – currently between 2.5 and 17.5 per cent per annum (compare Regulations in terms of s 36 of the Pensions Act 24 of 1956 and s 106(1)(a) read with s 108(1) of the Financial Sector Regulation Act 9 of 2017.) When an annuitant dies, the death benefit is payable to a nominated beneficiary or the estate of the insured. A pension-interest benefit is an asset for the purposes of the division of an estate at divorce, and includes both pension and provident funds. Living annuities, however, do not fall within the definition of “pension interest” as defined in s 1 of the Divorce Act.In CM v EM ((1086/2018) [2020] ZASCA 48; [2020] 3 All SA 1 (SCA); 2020 (5) SA 49 (SCA) (5 May 2020)), the Supreme Court of Appeal, in an appeal from the full court of the Gauteng Division of the High Court, sitting as court of appeal, had the opportunity to determine where the ownership of capital invested in the form of a living annuity vests, as well as whether the value of an annuitant spouse’s right to future annuity payments is an asset in his or her estate and therefore subject to accrual. Accrual in respect of an estate is the amount by which the net value of the estate at the dissolution of a marriage exceeds the net value of that estate at the commencement of the marriage. At the dissolution of a marriage owing to death and subject to the accrual system, the spouse whose estate shows no accrual, or a smaller accrual than the estate of the other spouse, has a claim against the other spouse or his or her deceased estate.It is submitted that some implications of the accrual dispensation, particularly within the context of certain pension and financial products, are still in their discovery phase, nearly 40 years after their introduction. In the absence of any reference to a living annuity in an antenuptial contract, the question was always whether such an investment is subject to the accrual system at divorce or death. In the context of a life assurance policy, the surrender value of the policy was taken into account in the event of divorce, but in the event of death, the question was whether, for accrual purposes, the factor taken into account should be the surrender value or the policy proceeds. As only assets that form part of the estate of a spouse can be considered for accrual purposes, the very nature of a living annuity had to be investigated in the matter of CM v EM (supra). This case was an application for special leave to appeal from the full court in the matter of Emilio Pietro Valfredo Montanari v Charmaine Helen Montanari (Montanari v Montanari).

A Nudge to Quit? The Effect of a Change in Pension Information on Annuitization, Labour Supply, and Retirement Choices Among Older Workers

We study the effects of two exogenous modifications in the Swedish pension system application form nudging individuals towards a fixed-term payout. Meanwhile, the set of available options and the default option—life annuity—were unchanged during the period under study. We examine the effects on individuals’ payout decisions and the spillover effects on labour supply and other pensions using a difference-in-difference framework and detailed administrative data on actual payout decisions and a wide range of individual-level outcomes. Each modification increased the demand for the nudged payout by around 30 percentage points. The first modification also induced individuals to work less.

Valuation of long-term care options embedded in life annuities

In most industrialised countries, one of the major societal challenges is the demographic change coming along with the ageing of the population. The increasing life expectancy observed over the last decades underlines the importance to find ways to appropriately cover the financial needs of the elderly. A particular issue arises in the area of health, where sufficient care must be provided to a growing number of dependent elderly in need of long-term care (LTC) services. In many markets, the offering of life insurance products incorporating care options and LTC insurance products is generally scarce. In our research, we therefore examine a life annuity product with an embedded care option potentially providing additional financial support to dependent persons. To evaluate the care option, we determine the minimum price that the annuity provider requires and the policyholder’s willingness to pay for the care option. For the latter, we employ individual utility functions taking account of the policyholder’s condition. We base our numerical study on recently developed transition probability data from Switzerland. Our findings give new and realistic insights into the nature and the utility of life annuity products proposing an embedded care option for tackling the financing of LTC needs.

Partial recall: differences between actual and self-reported annuitization decisions in Sweden

This paper reports the results from a large telephone survey of 1,000 retiring white-collar workers in Sweden. Shortly before the interview, the participants at age 65 had a choice of receiving a life annuity by default or opting for a fixed-term payout, with a minimum payout length of 5 years. Large monetary amounts were at stake in the payout decision of the survey participants; the average monthly pension payment under the life annuity amounted to US $280. Comparing the survey responses with administrative records on actual payout choices, I find that a majority of retiring white-collar workers fail to recall their payout decision. The recollection rate is much lower among annuitants (those who chose the default option); only 40% of the annuitants accurately recalled their payout decision compared to 77% of those who opted for a fixed-term payout. Beyond payout choice, few individual characteristics predict successful recollection.

Addressing the Pension Decumulation Phase of Employee Retirement Planning

Longevity increases and population ageing create challenges for all societal institutions, particularly those providing retirement income, healthcare, and long-term care services. At the individual level, an obvious question is how to ensure all retirees have an adequate, secure, stable, and predictable lifelong income stream that will allow them to maintain a target standard of living for, however, long the individual lives. In this chapter, we review and discuss the main pension decumulation options by explicitly modelling consumers’ behaviour and objectives though an objective function based on utility theory accounting for consumption and bequest motives and different risk preferences. Using a Monte-Carlo simulation approach calibrated to US financial market and mortality data, our results suggest that purchasing a capped participating longevity-linked life annuity at retirement including embedded longevity and financial options that allow the annuity provider to periodically revise annuity payments if observed survivorship and portfolio outcomes deviate from expected (or guaranteed) values at contract initiation deliver superior welfare results when compared with classical annuitization and non-annuitization decumulation strategies.