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TSP Annuities

 

          >   How does the TSP select its annuity provider?
          >   When was the most recent annuity contract awarded?
          >   Are there changes as a result of this new contract?
          >   Why were these changes made?
          >   How can I be sure that the annuity provider will stay in business and be able to pay my annuity throughout my lifetime?
          >   What will happen to my annuity if the TSP changes its annuity provider?
          >   What is the interest rate index?
          >   What is an interest rate swap?
          >   Which month’s interest rate index will be used for my annuity?
          >   Where and when can I find the interest rate index for TSP annuities?
          >   Can I change the amount of my annuity payment?
          >   Can I cancel my annuity and elect another withdrawal option?
          >   What does insurable interest mean?
            
          >   Back to FAQ Table of Contents

   

1.  How does the TSP select its annuity provider? Return to Top of this Page

The annuity provider is selected through a competitive procurement. Vendors are required to meet minimum qualifications for ratings and licensure before their proposals are considered for evaluation. The proposals of vendors that meet these minimum requirements are then evaluated by the TSP for financial responsibility and solvency, administrative capability, business plan, and cost. The selected annuity provider is awarded a 3-year contract with a provision for one 2-year option.

2. When was the most recent annuity contract awarded? Return to Top of this Page

The Agency awarded Metropolitan Life Insurance Company (MetLife) the contract to provide TSP annuities on January 17, 2006.

3. Are there changes as a result of this new contract? Return to Top of this Page

The interest rate index, which determines each month’s annuity rate, has changed. In addition, the monthly annuity factors used in calculating the annuity payment are based on a new mortality (death rate) table.

The new interest rate index and monthly annuity factors will apply to annuities purchased on and after April 1, 2006. Because it takes a few days for MetLife to receive the request and funds for annuity purchases, an annuity request processed at the very end of March 2006 will also be subject to the new interest rate index and new monthly annuity factors.

4. Why were these changes made? Return to Top of this Page

The interest rate index was previously based on a 3-month average of 10-year U.S. Treasury notes. The new interest rate index, based on interest rate swaps, will more closely reflect current market rates. The monthly annuity factors will now be based on the Annuity 2000 Mortality Table instead of the 1983 Individual Annuity Mortality. The Annuity 2000 Mortality Table reflects the most up-to-date mortality experience for individual annuities and is now widely used and accepted by annuity providers.

5. How can I be sure that the annuity provider will stay in business and be able to pay my annuity throughout my lifetime? Return to Top of this Page

It is highly unlikely that a TSP annuity provider would become insolvent (go out of business). The TSP avoids the likelihood of such an event by requiring that prospective vendors meet rigorous standards of financial responsibility and solvency, including minimum insurance ratings. For example, our solicitation for an annuity provider required the contractor to demonstrate that 1) it has an A.M. Best rating of "A++" or "A+" for each of the past 10 years as published in "Best's Insurance Reports" from 1995 through 2004; and 2) it has received a rating no lower than AA- from the current ratings by Standard & Poor's and Fitch, and a current rating no lower than Aa3 from Moody's. These ratings are recognized standards in the industry. Also, the solicitation includes additional stringent criteria to ensure that any annuity provider to the TSP will be financially strong and responsible.

6. What will happen to my annuity if the TSP changes its annuity provider? Return to Top of this Page

If in the future a new contract is awarded to a different provider, all annuities purchased from MetLife will continue to be serviced by MetLife.

7. What is the interest rate index? Return to Top of this Page

The index is a benchmark for market interest rates that is used for pricing the TSP annuities, the interest rate index is not a rate of return. The index is the average of the 10-year interest swap rates for the eight weeks ending on the next-to-the-last Friday of the month prior to the month in which the annuities will be purchased. Rates for interest rate swaps are published weekly by the Federal Reserve in statistical release H.15. The interest rate index is rounded to the nearest one-eighth of one percent.

For example, annuities purchased in the month of April 2006 would be based on the value of the interest rate index determined in April 2006, which would be calculated using the swap rates from the week ending February 3, 2006, through the week ending March 24, 2006. The rates for those weeks were 5.070%, 5.080%, 5.110%, 5.090%, 5.140%, 5.290%, 5.250%, and 5.230% and the average of these rates is 5.158%, which, rounded to the nearest one-eighth of one percent, produces an interest rate index of 5.125%.

8. What is an interest rate swap? Return to Top of this Page

An “interest rate swap” is a contract between two parties to exchange interest payments on the same amount of a notional/theoretical principal. Counterparty A pays a fixed rate and Counterparty B pays a floating rate, usually LIBOR (London Interbank Operating Rate). Because the floating rates are generally LIBOR, swap rates are quoted based on the fixed rate. These derivative instruments are very useful for the management of interest rate risk; however, the importance of these instruments for the TSP Annuity program is that they provide a good measure of interest rates relative to the kinds of assets, which are used by insurance companies to fund their annuity liabilities.

9. Which month’s interest rate index will be used for my annuity? Return to Top of this Page

If you request an annuity toward the end of a month, your annuity may not be purchased until the following month. This means that the annuity provider will use the interest rate index in effect for the month in which the annuity was purchased –— which may not be the rate that was in effect at the time the TSP processed your request.

10. Where and when can I find the interest rate index for TSP annuities? Return to Top of this Page

The interest rate index will be posted on this Web site in the What’s New section under Current Information. The index will be available during the last two weeks of the month prior to the month of purchase (e.g., the April annuity interest rate index was posted on March 21).

11. Can I change the amount of my annuity payment? Return to Top of this Page

On the date that the annuity provider receives your request and the money from your TSP account, the annuity is purchased. Once it is purchased, you cannot change the annuity option or the joint annuitant.

12. Can I cancel my annuity and elect another withdrawal option? Return to Top of this Page

On the date that the annuity provider receives your request and the money from your TSP account, the annuity is purchased. Once it is purchased, you cannot cancel the annuity.

13. What does insurable interest mean?Return to Top of this Page

Insurable interest" means that the person is financially dependent on you and could reasonably expect to derive financial benefit from your continued life.

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