Calculating the Annuity Payout

In addition to investment performance, MMBB considers five factors when calculating the annuity payout.

The payout value is determined after evaluating five factors which impact the payout value:

  • The value of the underlying assets
  • The 4% advanced earnings assumption
  • Adjustment for mortality experience
  • Deferred investment experience
  • Recovery of excess payments

The Value of the Underlying Assets

The payout value of the annuity unit is directly linked to the value of the assets in the annuity fund. In order to assure the health and longevity of the Annuity Fund, there has to be a reasonable degree of financial synergy between the value of an annuity unit and the amount of money that is paid out per unit. If the underlying value of an annuity unit is $85, a payout value of $95 per annuity unit would not be feasible without causing a negative gap which could not be sustained.

The 4% Advanced Earnings Assumption

MMBB makes the assumption that the investments in the Annuity Fund will earn a minimum of 4% during your retirement years. If the investments in the Annuity Fund earn more than 4% for the 12 months ending September 30, this may result in an increase in your annuity payments in the following year. When the investments in the Annuity Fund earn less than 4%, the following year’s payout may be reduced.

Adjustment for Mortality Experience

Actuarial tables are used to determine how much money a company needs to maintain in its cash reserves to continue to pay future benefits.

As people live longer, a lifetime annuity such as MMBB’s must pay people longer. This is good news, but it also requires that MMBB assure that the annuity payout is structured to account for increased longevity. Here’s an example: Let’s suppose that an annuitant is expected to live 20 years after retirement and is receiving a monthly annuity of $500. If the annuitant’s life expectancy increased to 25 years after retirement then the monthly annuity has to adjust to $400 to account for the additional five years of life.

Recovery of Excess Payments

MMBB’s downside guarantee assures that our members will never experience more than a 5% drop in the payout price during the first year of an economic downturn and no more than 10% decrease in the payout price in the second or subsequent year of market declines.

This guarantee means there may be years when the amount that MMBB pays per unit is greater than the underlying value of an annuity unit. When this occurs the difference must be factored into how the payout is determined in subsequent years in order to recover the gap between what we paid and the actual value of a unit in the Annuity Fund.

As the Board of Managers balances your best interests with its fiduciary responsibility each of these factors must be considered in order to arrive at the unit payout value each year

Annuity Unit Gap Tracker

While the MMBB annuity provided our members with a soft landing during the Great Recession, it also created a gap between what MMBB paid its annuitants and what the annuity fund could support over the long term. The Gap Tracker Chart shows the gap:

The MMBB Annuity Payout Gap Tracker chart allows you to follow the relationship between the actual value and the payout value of a unit in the Annuity Fund. It allows you to track MMBB’s effort to eliminate the gap through investment performance, as positive investment performance increases the value of the Annuity Fund assets. It also shows how MMBB has successfully cushioned our members from the full impact of the market downturn. The MMBB Annuity Payout Gap Tracker is updated on a monthly basis. The Unique Value is updated monthly. The Payout Value is updated in January.

  • The horizontal axis represents time – contracted from 2000-2008 and expanded from January 2009 through the present.
  • The vertical axis shows the unit price – from $50 through $90.
  • The green line shows the unique unit value (i.e., actual value) of the assets in the annuity fund which includes investment performance adjusted for prior unit payments, mortality experience and the 4% advanced earnings assumption. The unique unit value of the annuity fund ranged from a high of $84.46 in 2007 to a low of $57.85 in February 2009.
  • The purple line represents what we have been paying you. This ranges from $84.46 per unit in 2008 to $71.33 today.

Except for a brief period from the end of 2010 through the first half of 2011, there has been a negative gap between the unique value of a unit in the annuity fund and what MMBB has paid as an annuity unit value since the end of 2008.

Obviously the gap must be closed. To protect the annuity fund for the long-term, MMBB is working hard to close the gap between the actual value of a unit of the annuity fund and the payout value. To do so, we use the following strategies:

  • Growth in the value of the annuity fund through favorable investment performance. In this regard, as the chart shows, we’ve been very successful.
  • We reduce annuity payouts to members (but of course subject to the helpful minimum annuity guarantee). The payout price was reduced 5% in 2009, 2010 and 2011.
  • Finally the MMBB Board of Managers agreed to subsidize the annuity fund with an infusion of $6 million from MMBB’s reserves to maintain the payout value in both 2013 and 2014 – despite the gap.