There are a lot of benchmarks to measure yields in the financial industry. There are indexes for stocks, bonds and even real estate, but there was not an index to measure the annuity industry. CANNEX recently introduced the PAY (Payout Annuity Yield) index so that the income annuity industry would have a benchmark. Benchmarks help to determine the strength of the industry and give consumers and insurance companies a comparison for their own products. CANNEX’s PAY Index determines the average lifetime yield that one can expect from an income annuity, rather than only having rates from specific companies to compare. Simon Dabrowski gives more detailed information on CANNEX’s annuity yield for Annuity Outlook Magazine in “Creating an Annuity Benchmark for the Retirement Industry.”
The presence of this index will help to increase competition between insurance carriers because they want their pricing to be in line with the index. The PAY also helps consumers to determine the benchmark spending rate, which is the most money that they can spend each year without accounting for inflation. You can also compare this new income annuity index to the bond index to get a better comparison of the two markets. Users of the PAY index will have an easier way to analyze the costs and benefits of their income annuities and figure out an annuity’s place in their retirement plan.
Three age groups are used when determining the PAY index figures. CANNEX uses the average Single Premium Immediate Annuity annual payout for 70-year old males, 65-year old females and a couple aged 70 (male) and 65 (female). The top ten insurance companies for income annuity sales are used to determine the index. CANNEX discards the maximum and minimum values before taking an average of the weekly quotes for all three age groups. They annualize the average payout and then divide it by the premium to determine the payout yield. Individual insurance companies will have a yield higher or lower than the index because of the index being an average. Your personal yield will be adjusted based on age, death benefits or the length of your annuity term.
Between 2005 and 2008, the economic environment was good and the PAY index was high. It got much lower in 2008 with the collapse of the housing market and other economic turmoil. Since interest rates are finally on the rise, the PAY is slowly increasing after a long decline. This index can be used in many different ways. The PAY index is indicative of current market trends, so a quick glance can tell you whether annuity payouts are high or low. SPIAs are the most efficient way to obtain guaranteed income, so the PAY index helps create a benchmark spending rate. By looking at the chart, you can determine how much you can spend annually, without adjusting for inflation. This index can also help consumers compare SPIAs and corporate bonds as well as comparing mortality credits with bond yields. You can see the monthly Payout Annuity Yield report from CANNEX and use it to serve as your own annuity benchmark.
Written by Rachel Summit