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.