Skip to main content
×
×
Home

Framing and the annuitization decision – Experimental evidence from a Dutch pension fund

  • CHRISTIAN BOCKWEG (a1), EDUARD PONDS (a2), ONNO STEENBEEK (a3) and JOYCE VONKEN (a4)
Abstract

We report the effects of framing settings in annuity demand after conducting a survey-based experiment with members of a Dutch occupational pension plan. We gave participants the option to allocate up to 20% of their projected pension accrual to a lump sum. In particular, we investigated the joint effects of consumption and investment frames and gain and loss frames. We present strong evidence for framing effects in annuity demand. Framing effects remain significant when we control for individual characteristics. We also find robust evidence of individual characteristics influencing annuity demand, highlighting the importance of heterogeneity among participants, for example risk aversion, time preference and trust in the pension fund. Gender and long-term debt positions have significant impact how one responds to framing. We conclude that Dutch plan members generally welcome the partial lump sum option over mandatory full annuitization. The application of frames appears to predictively steer annuity demand. The precise effect framing may have, would probably also depend on the institutional environment, which predefines the perspective through which individuals filter annuities.

Copyright
References
Hide All
Agnew, J. R. and Szykman, L. (2010) Annuities, financial literacy and information overload. Pension Research Council WP, 33.
Agnew, J. R., Anderson, L. R., Gerlach, J. R. and Szykman, L. R. (2008) Who chooses annuities? An experimental investigation of the role of gender, framing, and defaults. American Economic Review, 98: 418422.
Alilovic, L. (2016) Effect of peer information on pension payout decisions. Tilburg University, Working Paper.
Barsky, R. B., Juster, F. T., Kimball, M. S. and Shapiro, M. D. (1997) Preference parameters and behavioral heterogeneity: An experimental approach in the Health and Retirement Study. The Quaterly Journal of Economics, 112(2): 537579.
Bart, F., Boon, B., Bovenberg, L., van Ewijk, C., Kortleve, N., Rebers, E. and Visser, M. (2016) De routekaart naar een meer integrale benadering van wonen, zorg en pensioen. Netspar Occasional Paper, 01/2016.
Bateman, H., Eckert, C., Iskhakov, F., Louviere, J. J., Satchell, S. E. and Thorp, S. (2016) Individual capability and effort in retirement benefit choice. Journal of Risk and Insurance. First online since 24 August 2016.
Benartzi, S., Previtero, A. and Thaler, R. H. (2011) Annuitization puzzles. Journal of Economic Perspectives, 25: 143164.
Beshears, J., Choi, J. J., Laibson, D. and Madrian, B. C. (2009) The importance of default options for retirement saving outcomes: Evidence from the United States. In Social Security Policy in a Changing Environment. Chicago: University of Chicago Press, pp. 167195.
Beshears, J., Choi, J. J., Laibson, D., Madrian, B. C. and Zeldes, S. P. (2014) What makes annuitization more appealing? Journal of Public Economics, 116: 216.
Brown, J. (2007) Rational and behavioral perspectives on the role of annuities in retirement planning. NBER Working Paper, 13537.
Brown, J. R. and Nijman, T.. (2012) Options to improve the decumulation of pension wealth in the Netherlands. In Bovenberg, L., van Ewijk, C. and Westerhout, E. (eds), The Future of Multi-Pillar Pensions. Cambridge: Cambridge University Press, pp. 330372.
Brown, J. R., Kling, J. R., Mullainathan, S. and Wrobel, M. V. (2008). Why don't people insure late life consumption: A framing explanation of the under-annuitization puzzle. NBER Working Paper Series Working Paper, 13748.
Brown, J. R., Ivkovic, Z. and Weisbenner, S. (2015) Determinants of intertemporal choice. Journal of Financial Economics, 116(3): 473486.
Brown, J. R., Kapteyn, A., Luttmer, E. F. P. and Mitchell, O. S. (2013) Cognitive constraints on valuing annuities. NBER Working Paper, 19168
Brown, J. R., Kapteyn, A. and Mitchell, O. S. (2016). Framing and claiming: How information-framing affects expected social security claiming behavior. Journal of Risk and Insurance, 83(1): 139162.
Bütler, M., Teppa, F. (2007) The choice between an annuity and a lump sum: Results from Swiss pension funds. Journal of Public Economics, 91(10): 19441966.
Cappelletti, G., Guazzarotti, G. and Tommasino, P. (2013) What determines annuity demand at retirement? Geneva Papers on Risk and Insurance-Issues and Practice, 38(4): 777802.
Chalmers, J. and Reuters, J. (2012) How do retirees value life annuities? Evidence from public employees. Review of Financial Studies, 25: 26012634.
Fagley, N. S. (1993) A note concerning reflection effects versus framing effects. Psychological Bulletin, 113(3): 451452.
Garciá-Huitrón, M. and Ponds, E. H. M. (2015) Worldwide Diversity in Funded Pension Plans: Four Role Models on Choice and Participation. Available online at http://ssrn.com/abstract=2606616.
Gentry, W. M. and Rothschild, C. G. (2006) Lifetime Annuities for US: Evaluating the Efficacy of Policy Interventions in Life Annuity Markets. American Council for Capital Formation. Available online at www.accf.org.
Financial Conduct Authority (2014) Does the framing of retirement income options matter? A behavioral experiment, December 2014, FCA.
Hanemann, W. M. (1994) Valuing the environment through contingent valuation. Journal of Economic Perspectives, 8(4): 1943.
Hu, W.-Y. and Scott, J. S. (2007) Behavioral obstacles in the annuity market. Financial Analysts Journal, 63(6): 7182.
Hurd, M. and Panis, C. (2006) The choice to cash out pension rights at job change or retirement. Journal of Public Economics, 90(12): 22132227.
Kahneman, D. and Tversky, A. (1979) Prospect theory: An analysis of decision under risk. Econometrica, 263291.
Kahneman, D. and Tversky, A. (1984) Choices, values, and frames. American Psychologist, 39(4): 341.
Kemna, A. A., Ponds, E. H. M. and Steenbeek, O. W. (2011) Pension funds in the Netherlands. Journal of Investment Consulting 12(1): 2834.
Lusardi, A. and Mitchel, O. (2007). Financial literacy and retirement preparedness: Evidence and implications for financial education. Business Economics, 42(1): 3544.
Ministerie van Sociale Zaken en Werkgelegenheid (2016) Kamerbrief Perspectiefnota Toekomst Pensioenstelsel, kamernr. 2016-0000162957, The Hague.
Mottola, G. R. and Utkus, S. P. (2007) Lump sum or annuity? An analysis of choice in DB pension payouts. Vanguard Center for Retirement Research, 30(89): 2.
Pensioen Federatie (2015) The Dutch Pension System.
Previtero, A. (2014) Stock market returns and annuitization. Journal of Financial Economics, August 2014, 202214.
Shoven, J. and Slavov, S. (2006) Political risk versus security. NBER Working Paper, No. 12135.
Thaler, R. (1985) Mental accounting and consumer choice. Marketing Science, 4(3): 199214.
Tversky, A. and Kahneman, D. (1981) The framing of decisions and the psychology of choice. Science, 211(4481): 453458.
Van der Heijden, E., Klein, T. J., Müller, W. and Potters, J. (2012) Framing effects and impatience: Evidence from a large scale experiment. Journal of Economic Behavior and Organization, 84(2): 701711.
Whittington, D. (2002) Improving the performance of contingent valuation studies in developing countries. Environmental and Resource Economics, 22(1–2): 323367.
Wu, S., Bateman, H., Stevens, R. and Thorp, S. (2017) Income-indemnity long-term care insurance: selection, informal care, and precautionary saving. Working Paper, 2017/08, ARC Centre of Excellence in Population Ageing Research (CEPAR).
Yaari, M. E. (1965). Uncertain lifetime, life insurance, and the theory of the consumer. Review of Economic Studies, 32 137150.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Pension Economics & Finance
  • ISSN: 1474-7472
  • EISSN: 1475-3022
  • URL: /core/journals/journal-of-pension-economics-and-finance
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed