Pension Annuity Prices Level Entering September

According to the Mercer U.S. Pension Buyout Index, the economic cost of retaining retirees in pension plans also remained essentially level during the month, showing a slight decrease from 108.2% to 108.1% of accounting liability.

The Mercer U.S. Pension Buyout Index allows plan sponsors to analyze the relative cost of a buyout by an insurer of retiree liabilities of a defined benefit (DB) plan and how that cost changes over time. In addition, the index shows the approximate long-term economic cost of retaining the retiree liabilities on a plan sponsor’s balance sheet, which includes an allowance for the future expenses and risk margin needed to maintain the obligations.

Based on this evaluation, plan sponsors can compare the approximate current cost of risk transfer through annuitization with the total cost of retaining obligations on the balance sheet.

Other findings from the index for the month of August include a slight increase in retiree buyout costs relative to the economic cost of retaining liabilities. Despite the increase, the current difference of 70 basis points still indicates that buyout premiums are potentially attractive for sponsors when compared with all-in retention costs that include pension benefit guarantee premiums, administrative costs and investment expenses.

Also notable among the findings is that interest rates continued to rise in August, leading to a decrease in the absolute cost of a pension buyout. The rising interest rates, though, were offset by a decrease in assets due to poor equity market performance. As such, the aggregate funded status of pension plans sponsored by Standard & Poor’s (S&P) 1500 companies remained close to level at an estimated 89% as of the end of August. That is up from 74% at the start of the year.

More information about the index and the August numbers can be found here.