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Time is right to annuitize pensions

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Better pension funding levels and a widening of spreads between corporate bonds versus Treasuries helped lift the relative attractiveness of annuitizing pension liabilities for another month. That’s according to the most recent Dietrich Pension Risk Transfer Index, which pegged the value of annuitization at 96.19 as of Oct. 1, up from September’s level of 94.77.

A higher index value indicates a reduction in the settlement costs associated with annuitizing pension obligations. The index is constructed by weighing all market conditions that would impact pension transfer costs.

Likewise, the index’s current annuity discount rate proxy stands at 3.21 percent, down two basis points since last month.

Rising interest rates did not play a role in the index’s month-over-month improvement, according to Geoff Dietrich, vice president of Dietrich & Associates.

“Long-term interest rates have slipped some since the Fed re-adjusted the outlook for their ‘easy money’ policy, but the cost to insure pension obligations via annuitization has not suffered,” Dietrich said in a statement. “This shows us that interest rates are not the sole factor driving the price of the index.”

He further pointed out that interest rates and the cost of pension risk transfers have dropped in lock step. Therefore, low interest rates cannot be used to dismiss undertaking an annuitization of pension obligations.

“This market is dynamic,” Dietrich stated. “There are too many factors involved and the index is proof of that. Dismissing a pension risk transfer due to interest rates alone is not sound decision-making.”

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