Playing to the weakness of retirees in the annuity market costly

When the working of the markets creates problems, when undesirable social results arise from market operations, especially when unrestrained, it is usual that people call for the government to intervene. Take the case of pollution. If a community cannot claim property rights, there is nothing they can do when a firm pollutes the environment except to call for government intervention. Economists and analysts describe this as a market failure situation.

Market failures can also arise when firms or agencies seek to conceal information, or what some may say “monopolize information.” There are some market interactions between consumers and sellers where because of the high cost of information gathering and other factors, both sides will never act with complete information; one side will always have more reliable information than the other side. One of those markets is the annuity market. You can buy an annuity with your pension savings so that it gives you an income until your death. If you desire to cover yourself against retirement during your old age, then you should meet a pension provider and ask for one.

Like pollution, undesirable social results can be the outcome when pension providers seek to influence the choice of retirees or hide necessary information that can impact on their making a decision. It has been reported that some pension providers go the length of putting pressure on their customers rather than giving them the information necessary for them to make an informed decision on annuities in the market, the market situation and the state of competition.

Also, it could be possible that the market is skewed in such a way that retirees do not know that a system of revealing important information about annuities exist and are made to depend on their pension providers. This system of information retrieval is called the open market option. Market failure would result if pension providers mask this system from their customers. Consumers lose out on benefits that must accrue to them from their investment, pension providers receive negative goodwill and the market eventually shrinks.

One solution to this problem is to make pension providers and other players in the market agree to a set of generally accepted practices. This is what the Association of British Insurers (ABI) in England, is proposing. Such self-regulation could be possible when all providers are under one umbrella body or when enforceable even for non-members of the ABI. Another solution is government regulation. The government can step in by providing a reporting system where consumers can complain if they believe a pension provider is not acting professionally. Several countries have one form or the other of financial services regulation. Where a pension provider can assert that it was acting in the best interest of the consumer, the problem could be if they are not asking enough questions of their customers, the retirees, who demand their professional services. This situation occurs often in the health insurance industry.

Whatever the situation is, making sure the market works efficiently is to the benefit of everyone. Market failures create social costs that raise the prices of goods and services; in such a situation, everyone loses.