Mortality Tables to Drive Down Pension Buyout Cost

The Mercer Global Pension Buyout Index notes that the Society of Actuaries released a new draft mortality table predicting longer life expectancy than those currently used to determine a plan’s accounting liability. Mercer says this change is expected to cause a larger increase in accounting liabilities than insurer pricing, causing a decrease in buyout premiums.

The index is designed to allow for the monitoring of pension annuity transactions pricing in the United States, as well as the UK, Ireland and Canada. Mercer uses up-to-date pricing information from each of the countries to estimate the cost of insuring a sample plan’s current retirees as a percentage of the equivalent estimated accounting liability in each country.

For the UK, the index finds that that estimated cost of a pension annuity transaction as a percentage of accounting liability was 1% lower in February than in January. For a plan with pensioner liabilities of £100 million, the relative cost of a pension annuity transaction versus accounting liability would have been around £1 million lower in February than in January.

With Ireland, the index finds the estimated cost of a pension annuity transaction (on a traditional annuity basis), as a percentage of accounting liability, increased by 1% to 117% at the end of February. The underlying accounting cost remained virtually unchanged and so the increase was driven by increases in the cost of purchasing bulk annuities.

As for Canada, the index finds the estimated cost of a pension annuity transaction, as a percentage of accounting liability, was approximately 0.2% lower in February than in January. For each $100 million of pensioner liabilities settled, the relative cost of a pension annuity transaction versus accounting liability would have been around $0.2 million lower.

The latest Mercer Global Pension Buyout Index may be downloaded from here.