Longevity annuities have received an unexpected vote of encouragement from the National institute on Retirement Security (NIRS).
These contracts “may make sense for some small defined benefit plans,” said Diane Oakley, executive director of the Washington non-profit researcher, in an issue brief. NIRS focuses on research and education about retirement security, particularly regarding public pension plans (such as for government workers).
To annuity professionals, the words may seem like limited or constrained approval of these specialized fixed annuities. However, considering that the comment comes from a top executive at NIRS, and that NIRS is not known as an advocate for using annuities in defined benefit (DB) pension plans, the annuity industry may find the statement of value — a positive view of fixed deferred income annuities from a pension expert.
Oakley took care to distinguish use of longevity annuities inside of certain DB plans from use of fixed annuities with DB plans in general.
“While fixed annuities provide a steam of predictable, stable income to retired workers,” she wrote, “their lower investment returns can significantly add to the cost of providing retirement income.”
But where longevity annuities are concerned, it’s another story.
The longevity annuity’s value
“Given their ability to capture a large share of the economic value of an immediate annuity at a fraction of the cost, some DB pension plans might find value in longevity annuities,” she said.
“Smaller public pensions might use them as a cost-effective way to transfer tail-end mortality risk to an insurance company.
“At the same time, longevity annuities would also preserve the bulk of the plan assets to invest in a broadly diversified portfolio.”
In the 36-page document, Oakley pointed to the qualifying longevity annuity contracts (QLACs) as an example how longevity annuities can work in retirement plans.
Final rules released last year by the Department of Treasury and the Internal Revenue Service allow QLACs to be purchased inside of 401(k) and IRA accounts. The rules allow account owners to use up to 25 percent of their account balance or (if less) $125,000 to purchase a QLAC. In return, the policyowners can delay paying their age 70.5 required minimum distributions (RMDs) on QLAC premiums until the annuity income starts, which can be as late as age 85.
Though she sees possible use of longevity annuities by smaller DB plans, Oakley called for more research into this application.
She suggested research in another area as well. If a DB pension buys longevity annuities as assets of the plan, she posited that the retirees should not have RMD tax issues since the retirees “will still receive monthly benefit checks for the accrued pension. Nevertheless, clarification on this issue as well on the possible later starting age for DB plans would be helpful to plans as they consider longevity annuities.”
An adjunct, not replacement
NIRS’ receptivity to the longevity annuity is as an adjunct to certain public DB pension plans, not a replacement for them. The researcher still sees public pension plans as exceling in critical retirement areas.
For instance, public DB plans “provide the same amount of monthly retirement income at a much lower cost than both a typical DC (defined contribution) plan and a pension plan funded exclusively with fixed annuities purchased over a career,” Oakley wrote.
And public DB pension plans “provide significant consumer protections in state law, while annuities have different consumer protections in state regulation and insurance law.”
In view of the “significant up-front cost” of funding retirement benefits with only fixed annuities, “most large public pension plans will likely continue to maintain their DB pensions, “ she predicted. These plans can ensure funding with “adequate contributions” and amortizing investment gains and losses as well as leveraging longevity improvements.
But some smaller DB plans may not have that kind of heft. These plans “might consider using longevity annuities within the plan to protect against increased longevity risk,” she said.
Is it allowed?
This is assuming that the plans are allowed to use these annuities. To that point, Oakley said “policymakers may want to verify that longevity annuities may be used by DB pension plans.”
If the concept gets the go-ahead, by regulation or legislation, this would likely open up new opportunities not only for pension plans but also for the emerging longevity annuity industry.
However, no one is going to draft a marketing plan for this just yet. The QLAC side of the annuity industry is still emerging, so news of sales — or even signed contracts—is not yet available. It is likely that policymakers will be looking for experience data here to get a sense of whether the option in DB plans may have legs.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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