Group Annuities: Top 5 Things Pension Sponsors Should Know

Corporate Annuity View – February 2011Group Annuities: Top 5 Things Pension Sponsors Need to KnowBy Jay Dinunzio*Single premium group annuities (aka annuity buy-outs, terminal funding/annuities, GAC’s) are wellestablished, effective vehicles that allow a pension plan to remove obligations from its balance sheet.The following create an environment where group annuities deliver real value to sponsors increasinglyinterested in solutions:  The Pension Protection Act of 2006  Movement towards mark to market pension accounting  Unprecedented capital markets volatility  Large company contributions  Popularity of liability driven investing  Institutional annuity product innovation  Increase in plan freezes and need for “exit strategies”  Robust UK($10-$20 Billion per year) annuity marketSurprisingly, there is a general lack of awareness of these products. However, marketconditions and clear demand are increasing their marketability. Given these factors here arethe top five things pension sponsors need to know about group annuities:#1-It’s not a matter of if plans buy annuities, it’s more a matter of when. Plan sponsors willlikely secure retiree benefits with an insurer. While annuities in recent years have traditionally beenpurchased in conjunction with a plan termination, there is no reason why a plan sponsor could not orshould not consider more strategic purchases prior to terminating the plan.#2-Custom, custom, custom. Terms can be customized to the unique needs of the plan allowingsmall and middle market buyers the ability to access solutions designed specifically for them,something that traditional asset managers only offer to their largest clients. The ability to customizegroup annuity contracts make these products a viable potential solution for any pension planregardless of size or funded status.#3-Spot rate pricing. Institutional guaranteed insurance products are typically priced using dailyspot rates. While each contract’s cost is dependent on a variety of specific factors, generally speakingguaranteed products provide yields somewhere in the range of US Treasuries plus 50-150 basispoints.#4-Well established marketplace. While sales tend to ebb and flow, over the last dozen yearsthere have been 300-400 pension annuity contracts sold annually with total annual sold premiumranging from $1 billion to $4 billion. Some estimate sales volumes may increase 400% in comingyears.#5-New insured solutions coming to market. Guaranteed separate account products are readilyavailable that offer additional protections in the unlikely event of insolvency. Additionally, buy-inannuity products (popular in the UK) are investment contracts that allow sponsors to dedicate assetsto fund covered benefits without formally removing the obligations from the sponsors balance sheet.There are approximately 10 carriers currently issuing new institutional insurance products.Only the largest, most highly rated, and well capitalized US life companies issue theseproducts.Many are betting on, and investing in a resurgence of these products. CorpAnnuity.com ©Copyright 2011 IST Annuity Services. All rights reserved.

Sources and LinksRetirement PlansEmployees Increasing Retirement Nest Eggs – On Wall StreetMore at risk of missing retirement goals – Employee Benefit NewsGE closes DB plan for salaried employees – Pensions & InvestmentsRetirement Looms: Time to Get Nervous – BloombergSlow and Steady Saving Still Pays – Marketwatch$1M Retirement Nest Egg Attainable, Consumer Reports Finds. – FinancialPlanning401(k) Participants Shun Company Stock - CFOAnnuities in the NewsBuilding a Cheaper Annuity – WSJIndex annuities are a safety trap - MoneyFuture Brightens for Struggling Annuities – On Wall StreetRegulation/Politics/Accounting/EconomicsBig corporate DB plans see deficit decrease – Employee Benefit NewsGiven devils bargain, Treasuries should be exorcised from portfolios:Gross – Investment NewsTop 100 pension funds assets up 6.2% in quarter – Pensions &InvestmentsSupremes Mull Pension Deception – CFOMarried Couples Guide To The New Estate Tax Law - ForbesInsurers/Companies in the NewsAt AIG, Focus Returns to Selling Insurance – WSJGenworth Ends Sales of Retail, Group Variable Annuities – WSJAIG Repays Final Bit of NY Fed Debt – WSJFidelity, MetLife Lifetime Income Annuity Hits $1B – On Wall StreetManulife paying price for lack of hedging – Investment NewsAIG MOVES CLOSER TO RECAPITALISATION – Financial TimesInsurers Sued Over Death Bets – WSJAIG Stocks Unlikely Comeback - WSJ*About the authorJay Dinunzio is an Associate Vice President of Retirement Services at USI Consulting Group. He hasover 12 years of experience working with institutional retirement plan sponsors of both defined benefitand defined contribution programs. Much of his career has been spent providing risk managementsolutions to defined benefit pension sponsors, including single premium group annuities, as well asbundled and outsourced pension administration arrangements. Additionally, Jay has worked closelywith various defined contribution stable value investment products. Connect with Jay:http://www.linkedin.com/in/jaydinunzioThe views expressed in this paper are the authors own and do not represent those of USI Holdings,Inc. or USI Consulting Group. CorpAnnuity.com ©Copyright 2011 IST Annuity Services. All rights reserved.

Group Annuities: Top 5 Things Pension Sponsors Should Know

by Jay Dinunzio

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Group Annuities: Top 5 Things Pension Sponsors Should Know Document Transcript