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Pension risk transfer index up in December

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A key measure of the relative attractiveness of annuitizing pension liabilities rose modestly in December.

The Dietrich Pension Risk Transfer Index, published by Dietrich & Associates, Plymouth Meeting, Pa., rose to 84.92 on January 1 from 81.31 at the start of December.  Dietrich & Associates attributes the gain primarily to 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, Dietrich discloses in a press statement. 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%.”

“The changes in this month’s index confirm a few items,” says Jay Dinunzio, senior consultant at Dietrich & Associates. “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.

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“Secondly, a long-running bull market within fixed income cannot likely persist forever,” he adds. “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,” he continues. “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.”

The Dietrich Pension Risk Transfer Index provides a 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 mechanism for monitoring settlement market conditions; and to support effective plan governance and decision making.