Pension Annuitization Attractiveness Up for New Year

The index currently sits at 84.92 as of January 1, up from its prior month level of 81.31. The rise in the index was driven primarily by an increase in the relationship of current annuity rates compared to one-, three- and five-year historical annuity rates. This change was a function of older, higher interest rate environment years falling out of the historical average calculations.   

Modestly higher pension funding levels also contributed to the index ascending to its highest level in several months. The current annuity discount rate proxy embedded within the index is currently at 2.54%.  

According to Jay Dinunzio, Senior Consultant at Dietrich & Associates: “The changes in this month’s index confirm a few items. First, we have been in a low and declining interest rate environment for some time. If rates stay persistently low and economic growth is sluggish, the attractiveness of locking in fixed income like returns via annuitization increases. Secondly, a long running bull market within fixed income cannot likely persist forever. The Fed has hinted at a move away from quantitative easing and the ten year U.S. treasury yield has risen nearly 30 basis points over the last month. While longer term interest rate trends are still unclear, the prospects for future rising interest rates seem to be improving. Regardless of current spot interest rate levels, we recommend that frozen pension plan sponsors engage in analyzing their pension risk transfer options and costs as part of an overall pension risk management strategy.”