Pension Annuitization Attractiveness Hangs On

The Dietrich Pension Risk Transfer Index, which tracks the relative attractiveness of annuitizing pension liabilities, remained basically unchanged through February and into March.

As of March 1, the index sits at 95.27, falling slightly due to continued slides in interest rates. The index’s annuity discount rate proxy of 3.12% lost six basis points from the previous month. 

U.S. Treasury and corporate bond yields continue to fall, offsetting rebounds in plan funding levels that resulted from a turnaround in the equity markets in February. While interest rates continue to trend downward, group annuity discount rates are not falling at the same pace and may offer value versus similar duration bonds.  

Rumors of another Pension Benefit Guaranty Corporation (PBGC) premium hike and preliminary reports on the findings of the Society of Actuaries’ mortality study, both potentially increasing plan liabilities, continue to spark plan sponsor’s interest in liability-driven investing (LDI) and de-risking strategies (see “PBGC Premium Hikes Shake Up Buyout Landscape”). 

An index score of 95.27 suggests eliminating retiree pension liabilities through a group annuity purchase remains a viable alternative to maintain the liabilities. “Retiree settlements can reduce the size and expense of a pension plan while allowing the remaining plan assets to focus exclusively on generating returns needed to minimize future costs and close funding gaps,” explains Geoff Dietrich, vice president of Dietrich & Associates.

The Dietrich Pension Risk Transfer 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 decision making.

The latest Dietrich Pension Risk Transfer Index calculations can be viewed here. Additional commentary is now available on YouTube.