Impact of PPA on annuity prices

[AndyH]

Opinions wanted:

Will the increase in the interest rates applicable for lump sum payments being phased in from 2008 to 2013 be meaningful enough to cause insurers to raise the rates (lower the costs) they use to price annuity purchases?

Large frozen plans that do not offer lump sums wil be faced with the choice of offering lump sums or annuitizing the plan. Will the annuity cost be favorably affected by this?

[Guest Carol the Writer]

Here's my opinion, for what it's worth. Insurors will follow the money market as far as interest rates go. But they will be extra-super-conservative with their estimation of mortality improvements, and that could serve to make annuities more - not less - expensive. That's why Congress wants to encourage participants to take annuities out of their DC plans, as opposed to lump sums - to insulate retirees from "outliving their assets."

I have heard rumblings that there are the beginnings of specially-priced impaired life annuities coming into the marketplace. These would be for people who may have, say, cancer or heart disease but who want to purchase annuities at slightly more favorable than "standard" rates. A reverse selection, if you will. Large plan sponsors may want to consider experienced rated group annuity contracts. Other than that, PPA probably will not force any changes in insurance companies' behavior and offerings, because the insurors are not in business to lose money.

For what it's worth, that's what I think.

Carol Caruthers, MSPA, EA