A Behavioural Analysis of Individual Choices and Decisions Concerning Pension Fund Decumulation

Many experimental studies find individuals make systematic decision errors in research tasks designed to mimic the annuitization decision. This reliance on experimental approaches is due to a lack of data on actual decision-making on the decumulation of pension assets. Using a unique dataset capturing the actual retirement product options presented to retirees, along with their subsequent choices, this thesis analyses three different aspects of decision-making at annuitization. First, it investigates whether individuals correctly assess the risk of default of annuity providers and incorporate this information into their decision-making when selecting annuities at retirement. To this end, we exploit an exogenous change in policy which decreased the coverage of government guarantees against annuity provider default. We show that individuals’ decisions are not impacted by their protection against the risk of default. Individuals are therefore unnecessarily reducing their annuity payments by not incorporating crucial information about their actual risk exposure to default into their annuity selections. Second, it analyses intra-household dynamics and whether the annuitization decisions of married couples are governed by an intra-couple bargaining process. To do so, we exploit an exogenous shock in the incentives of men to annuitize on retirement. The analysis finds that annuitization decisions of married couples are made jointly. Further, the spouse with the lowest pension wealth of the household, i.e., the lowest relative bargaining power, essentially provides longevity insurance for the household by annuitizing on retirement. Last, it examines whether choice overload affects annuitization. The findings show the likelihood of annuitizing increases with larger choice sets. However, consistent with choice overload, the probability of choosing a dominated annuity that provides lower payments increases as the choice set increases.