50 Shades of Pension Annuity Settlement Indicies

Now that I have your attention, I will quickly apologize for shamelessly borrowing the essence of a best-selling erotic novel, simply to enhance the  appeal and engagement of this post.  I digress.

Over the last few years, the US pension marketplace has witnessed the development of several indices which help support the discussion surrounding pension settlement costs. Primarily these pension settlement indexes (also called pension risk transfer or pension buy-out indexes) are marketing tools which help consulting and advisory firms to more effectively frame the pension settlement discussion with current and prospective clients. The objective of this post is to introduce readers to these indices and to discuss some of their similarities and differences. Before we delve deeper, it’s important for me to provide a few disclosures. First, nearly two years ago, I was fortunate to have worked closely on what I believe may have been the first pension settlement index to have been developed and publicly marketed in the US…The Dietrich Pension Risk Transfer Index.. This is an accomplishment that I am personally very proud of, but which introduces some inherent bias into my perspective on this issue, so feel free to draw your own conclusions. Second, I think all of the pension settlement indexes which I have seen and will discuss below have been thoughtfully designed by smart pension professionals, many of which I know personally, and have worked with over my dozen years working in the pension settlement marketplace. I have provided web links (at the end of this post) to each of the aforementioned indices, such that readers can conduct their own investigation and form their own opinions. Finally, I’d also ask that you consider weighing in on the poll at the end of this rant which asks the $60,000 question…”Which Annuity Settlement Index Method Do You Prefer?” Cue famous boxing referee Mills Lane…”LET’S GET IT ON”!!!

Dietrich Pension Risk Transfer Index:

  • Public inception: 2011
  • Back tested through date: January 2008
  • Current index level: 87.61 (Feb. 2013)
  • Commentary: Index is composed the following components:1. Average pension funding levels, 2. Current annuity rates/historical annuity rates (1yr, 3yr, & 5yr averages) & 3. Current annuity rates/current US Treasury & corporate bond yields. Settlement costs are lower as index rises. Only index which references pension funding levels.

QAS PRT 1000 Index:

  • Public inception date: Unknown
  • Back tested through date: September 2007
  • Current index level: Unknown
  • Commentary:”The QAS PRT 1000 Index© was constructed from research on 1000 of the largest DB plans in the U. S.  A Model Plan was populated based upon an analysis of present values from the largest 1000 DB plans.  The Model Plan uses common base line assumptions as a starting point:  RPA is the common mortality assumption and average RPA interest is the initial discounting rate.  The Model Plan was then valued using PPA mortality and PPA 3-Segment rates as of September 1, 2007.  The QAS PRT 1000 Index© is structured to have a beginning value of 100.0 as of September 1, 2007 which is the first applicable date for use of PPA 3-Segment rates.  The PPA 3-Segment Index of 100.0 as of September 1, 2007 becomes the Index Base” Source: http://www.qualifiedannuity.com/pdfs/prt1000index.pdf

Penbridge PRT Index:

  • Public inception date: 2012
  • Back tested through date: January 2011
  • Current index level: $32,203,715 (Feb. 2013)
  • Commentary: “The Penbridge PRT Index represents the premium that an insurance provider would charge for a buy-out of a “typical” DB plan, and illustrates when the timing is more or less favorable to effect a PRT transaction”. Based upon hypothetical plan cash flows for a $25,000,000 pension plan. Higher index values indicate higher settlement costs. References index relative to PPA spot and PPA segment funding rates. Index was recently rebranded from the former Camradata Pension Risk Transfer Index. Source: www.penbridgeadvisors.com

Mercer US Pension Buyout Index:

  • Public inception date: 2013
  • Back tested through date: December 2011
  • Current index level: 108% (eff 12/31/2012)
  • Commentary: “Published monthly, the Index tracks the relationship between the accounting liability for a hypothetical frozen traditional defined benefit plan and the estimated cost of transferring those liabilities to an insurance company. Annuity pricing data from a number of leading US life insurance companies is used to compile the Index.” Lower index values indicate lower settlement costs. Source: www.mercer.com

As you can see the indexes above have some similarities as well as some differences….after all, variety is the spice of life.  At the end of the day, I’m not sure either of these indices is better/worse than another (though if you twist my arm for a less politically correct answer I’ll tell you the Dietrich Pension Risk Transfer Index is very dynamic, well constructed, and something I strongly urge pension practitioners to evaluate). However, as my golf instructor tells me, “Jay, it’s not the arrow, it’s the indian that really matters”. I do however believe that the marketplace is better off having these indexes, and that they do a nice job of heightening the pension risk management dialogue to include the settlement discussion. In closing it think it’s also important to mention that none of these indexes are intended to replace the plan specific detailed analysis and consulting that would be necessary to effectively evaluate and execute a pension settlement transaction.






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