Implicit trade‐offs in replacement rates: Consumer preferences for firms, intermediaries and annuity attributes

An annuity is an insurance policy designed to protect the annuitant from longevity risk. However, retirees are willing to reduce annuity payments by choosing guaranteed periods or firms with better risk ratings, suggesting they are also concerned with the provider's default risk and bequeathing their heirs if they die early. We use a hedonic price model to estimate the demand for retirement products and the expected cost of providing annuities for companies. Then we analyze market outcomes under counterfactual scenarios that sequentially restrict consumers’ choice sets, forcing retirees to select quotes that maximize payments. We show that such restrictions could affect the pension system in other dimensions beyond annuity payouts—linking to a broader literature on the unintended consequences of regulating tariffs. We find that firms have low margins and slightly increase their payouts under restricted scenarios. The annuity share decreases, and replacement rates increase, but the restrictions lower consumer utility. They also generate a substantial deterioration in the rating distribution of selected firms.