The increase in the index, which tracks the
relative attractiveness of annuitizing pension liabilities, was driven mainly
by healthier pension funding levels, with a lesser contribution from
wider annuity rate spread levels. The annuity discount rate proxy embedded
within the index fell to 2.51%, which represents a new record low.
“Despite positive momentum over the last month, pension
annuitization affordability remains challenged by low interest rates and
depressed funded status levels,” Dietrich
& Associates Senior Consultant Jay Dinunzio said. “Sponsors will likely need increases across the
board in terms of contributions, interest rates and asset values in order to
close the funding gap … the combinations of how and when these increases are
realized will ultimately separate the winners from the losers."
Although the current environment does not encourage optimism, Dinunzio added that there are two target client types who are "optimal candidates" and "particularly well
suited to investigate pension annuitization."
According to Dinunzio, these include retiree heavy pension programs that have more than 50% of their obligations owed
to in-pay status pensioners and plans’ whose current asset allocation is
weighted towards fixed-income assets. "In these instances," he said, "the benefits of
annuitization may outweigh the costs involved, especially for frozen pension
sponsors focused on exiting the pension liabilities efficiently.”
The Dietrich Pension Risk Transfer
Index can be found here.