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Annuities and Other Retirement Products
still suffer losses from inflation. Another type of zero-rate guarantee is a “water-level� guarantee, in which interest, once earned, can never be lost again. These products typically offer customers a choice between a few investment categories with different risk profiles, but the actual investment management is left to the company. This option gives customers a choice to adjust their investment risk to their age or other aspects of their economic situation. The demand for unit-linked products has grown considerably in recent years, although it has not reached the levels found in other European countries. Unit-linked products offer customers a choice of investment funds with varying policies as well as a choice of fund managers. However, most of the unit-linked products used in Denmark carry some sort of protection against investment risk, usually a zero-rate guarantee. In addition, most customers have opted for products where fund managers determine the investment policy. Thus, a fair interpretation of the Danish unit-linked market would be that customers have not chosen unit-linked products because of the investment choice but rather because of the higher degree of transparency that these products offer. This option represents a partial move away from extensive risk sharing— a partial correction that may be fully justified in light of the large fall in guaranteed returns. In sum, the main features of the risk-sharing arrangements in the traditional annuity policies are that pension institutions assume the investment and longevity risks up to the level of guaranteed benefits, but in the declaration of periodic bonuses these risks are shared by participants. In the case of unit-linked products, the investment risk is borne by individual members, reflecting their choice of instrument, but the longevity risk is shared among participants. In deferred group annuities, the investment and longevity risks are shared among both active and retired workers, although special emphasis is placed on avoiding transfers across different cohorts (for instance, with regard to contracts that are issued at different levels of guaranteed benefits).
Regulation and Supervision Like providers of all financial services, pension institutions are subject to extensive regulation, the aim of which is to protect the interests of policyholders and members of pension plans and to promote a competitive and efficient market for pension saving products, during both the accumulation and payout phases.