August 16, 2012 (PLANSPONSOR.com) - The Dietrich Pension Risk Transfer Index, which tracks the relative attractiveness of annuitizing pension liabilities, declined significantly from its prior month’s level.
The Index measured 88.21 as of July 1, and currently sits at 79.8 as of August 1. This decrease (which was the largest one-month decline since the Index's inception) was driven by a fairly significant drop in pension funding and interest rate levels. The annuity discount rate proxy embedded within the index is at 2.54%, which also represents a historical low.
“Annuity costs have increased as the spot rate on corporate bond yields has fallen some 70 basis points during 2012," according to Jay Dinunzio, senior consultant at Dietrich & Associates. "Despite this environment we are seeing a flurry of settlement activity around sponsors offering voluntary lump sum payments to terminated vested participants. The statutory interest rates that govern these payments are typically set in advance and locked for a period of one year. Therefore, many plans may have a short window where they can settle some pension obligations at an interest rate significantly higher than current spot rates.” The Dietrich Pension Risk Transfer Index can be found at https://www.dietrichassociates.com.