Pension Annuitization Attractiveness Unchanged

As of April 1, the index reached 95.55, increasing slightly over last month. Modest gains in the annuity discount rate proxy (3.17%) and plan funding levels have helped turn the index trend around.

On average, the index finds the monthly cost to transfer pension risk off the corporate balance sheet has been steady this year. However, when taking a closer look there is much volatility that doesn’t register on a monthly metric, says Geoff Dietrich, vice president of Dietrich & Associates, based in Plymouth Meeting, Pennsylvania. “The planning behind the eventual transfer will dictate the outcome. Understanding the various options and carrier capacity, as well as the timing of the purchase, is crucial for plan sponsors looking to shed pension liabilities.”

The index provides a dynamically constructed, monthly directional data-point regarding the market conditions that affect settlement costs. Higher index values indicate a reduction in the settlement cost environment. The index was designed to provide pension stakeholders a thoughtful mechanism for monitoring settlement market conditions, and to support effective plan governance and decisionmaking.

To arrive at its final conclusions each month, the index considers three underlying financial ratios, which include: funded status level (50% index weight); current and historical annuity rates (30% index weight); and annuity rates versus Treasury and corporate bonds (20% index weight).

The April index results can be found here. A video of additional commentary can be viewed here.