Selection effects in the United Kingdom individual annuities market

This paper explores adverse selection in the voluntary and compulsory individual annuity markets in the United Kingdom. Two empirical regularities support standard models of adverse selection. First, annuitants are longer-lived than non-annuitants. These mortality differences are more pronounced in the voluntary than in the compulsory annuity market. We estimate that the amount of adverse selection in the compulsory market is about one half of that in the voluntary market. Second the pricing of different types of annuity products within each annuity market is consistent with individuals selecting products based, in part on private information about their mortality prospects.