Healthier pension funding amounts and to a lesser extent wider annuity rate spread levels led to an uptick in the relative attractiveness of annuitizing pension liabilities at the beginning of this month, reports Dietrich & Associates, Inc., which formulates the Dietrich Pension Risk Transfer Index™.
On September 1, the index stood at 81.33, up from the prior month’s level of 79.8, which was a historical low. Also at a historical low point was the annuity discount rate proxy embedded within the index that fell to 2.51%.
In a press statement from Dietrich & Associates, Jay Dinunzio, senior consultant at the Philadelphia-based provider of institutional annuity brokerage and consulting services, said that despite the positive improvement, pension annuitization affordability remains challenged due to low interest rates and depressed funded status levels. “Sponsors will likely need increases across the board in terms of contributions, interest rates and asset values in order to close the funding gap,” Dinunzio said. “The combination of how and when these increases are realized will ultimately separate the winners from the losers.”
Dinunzio went on to describe the two target client bases well suited for possible pension annuitization. They include retiree-heavy pension programs where more than 50% of the obligations are owned to in-pay-status pensioners and those plans whose current asset allocation is weighted toward fixed-income assets. “In these instances, the benefits of annuitization may outweigh the costs involved, especially for frozen pension sponsors focused on exiting the pension liabilities efficiently,” Dinunzio said.