Mercer Insights



The Mercer US Pension Buyout Index (the “Index”) tracks the relationship between the accounting liability for retirees of a hypothetical defined benefit pension plan and two cost measures: the estimated cost of transferring the pension liabilities to an insurance company (i.e. a buyout) and the approximate total economic cost of retaining the pension obligations on the balance sheet.

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During October, as indicated by the Index, the average cost of purchasing annuities from an insurer decreased from 109.5% to 108.9% of the accounting liability. During the same period, the economic cost of maintaining the liability remained level at 108.7% of the accounting liability.

Commentary on the Pension Buyout Index results for October 2014

  • A sentiment sometimes expressed by sponsors of defined benefit pension plans is that it’s too expensive to transfer liabilities to an insurer, as the cost to purchase annuities is greater than the accounting liability. However the accounting liability does not include all costs associated with maintaining the plan. As the chart above illustrates, there are periods where the cost of transferring liabilities to an insurer is less than the cost of maintaining the defined benefit plan for the sample retiree plan modelled.
  • The past several months have also illustrated the volatility in insurer annuity pricing as the buyout cost has fluctuated around the economic cost. The ability to frequently monitor insurer pricing against pre-determined thresholds, and be able to execute quickly, will be important in order to take advantage of this volatility and complete a buyout under favourable pricing conditions.
  • As previously discussed, based on a recent study by the Society of Actuaries, people are living longer than expected and as a result pension actuaries may soon have to update plan mortality table assumptions which will increase plan liabilities. We expect that the IRS may require plans to use the new tables to assess funding from 2016 or 2017, while auditors may expect sponsors to reflect the new tables for accounting purposes even earlier. While the actual increase to liabilities is dependent on the specific plan, increases of 5% - 10% are expected. This potentially significant increase to plan liabilities is another compelling reason for plan sponsors to purchase annuities and transfer the risk.
  • A corresponding increase in the cost to purchase annuities from an insurer is not expected as initial indications are that insurers have already reflected these longer life expectancies. In other words, pension liabilities are expected to increase while the cost to transfer liabilities to an insurer through a buyout is not.
  • Another compelling reason for transferring liabilities and risks are due to the recent significant increases in PBGC per participant premiums. These premiums, which are paid each year, for every participant, until they leave the plan (e.g., die) were recently increased by more than 30%, from $49 per participant in 2014 to $64 per participant in 2016, and increasing with inflation thereafter. A buyout eliminates paying these annual premiums along with other administrative costs which are often a large part of the cost in maintaining the plan.
  • The current economic environment, together with the increase in PBGC premiums and mortality update on the horizon, creates an attractive time for sponsors to consider an annuity buyout as an effective risk management tool. There are a number of steps involved in order to prepare for a buyout and so we recommend that sponsors act now to evaluate whether buyout is appropriate for them and develop an implementation strategy.
  • Sponsors considering a buyout in the future should also review their plan’s investment strategy and consider increasing their allocation to liability hedging assets, either immediately, given any recent improvements in funded status, or over time as the funded status improves. This can reduce the likelihood of the funded status declining again, leading to unexpected additional cash being required to purchase annuities at a later stage.

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About the Mercer US Pension Buyout Index

Published monthly, the Index allows plan sponsors to see at a glance the relative cost of a buyout by an insurer of retiree liabilities of a defined benefit 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 sponsor’s balance sheet. This economic cost includes an allowance for future retention costs (administrative, PBGC premiums and investment expenses) as well as a reserve for future improvements in mortality. These additional costs and reserves are not included in the accounting liabilities published by plan sponsors, but do represent future costs that should be reflected in any risk transfer comparison and evaluation. These costs will vary depending on the specifics of each plan. Based on this evaluation, sponsors can compare the approximate current cost of risk transfer through an annuity purchase with the total cost of retaining obligations on the balance sheet.

Annuity pricing data from a number of leading US life insurance companies are used to compile the Index. These insurers include American General, Massachusetts Mutual Life Insurance Company (MassMutual), MetLife, Principal, Pacific Life, Prudential and United of Omaha (Mercer is not associated with any of the aforementioned insurers). On a given month the Index may be compiled from pricing data from some or all of these insurers.




The Index is provided for a sample plan assumed to consist of retirees only with a duration of seven years. The Index is intended to illustrate general trends only as the actual premium can vary significantly for individual plans. Therefore, the Index should not be used to make plan design decisions. We would be happy to help you gain greater insight into insurer pricing for your plan.

It is important to note that the Index is based on a sample plan. Actual costs for terminating a plan including retirees and non-retirees will depend on a number of factors. Some of these may include:

  • The plan's benefit structure and timing of its anticipated benefit payments
  • The demographic profile of the plan's participants
  • Market conditions prevailing at the time benefits are distributed and annuities purchased
  • Insurer appetite and capacity for a transaction
  • Which employees, if any, receive and accept an offer to take a lump sum instead of an insured annuity


Methodology for preparation of the Mercer US Pension Buyout Index

  • Annuity buyout estimates are based on monthly quotations of discount rates for buyout purposes, provided by a number of leading insurers. The discount rates include risk and expense loads to cover all: 1) investment related risks including default, prepayment and reinvestment risk 2) margin against adverse experience 3) margin for profit or return on capital, and 4) expenses including overhead, set-up, per participant costs. The average discount rate is used.
  • The accounting liabilities were valued using the Mercer Yield Curve (MYC). The MYC is used by many Mercer clients to set their discount rate under ASC 715. A full description of the methodology can be found at
  • The buyout liability estimates were calculated by using the single discount rate (the average of the monthly quotations) applied to the same cashflows. Since insurance companies may use a more conservative mortality basis in their pricing than that used to produce accounting liabilities, a load of five percent has been applied to reflect this.
  • The accounting liability shown is assumed to be the Pension Benefit Obligation (PBO) under ACS-715.


Economic cost assumptions


Default risk control 0.40%
Asset management costs 0.10%
Future inflation 2.50%
Future mortality cost 2.50%
Participants 1,350
Retiree age 75
Initial liability 50,000,000
Per participant admin $30.00



The Mercer US Pension Buyout Index and any related commentary has been created for illustrative purposes, is presented at a particular point in time and should not be viewed as a prediction of the hypothetical plan or a specific plan's future financial condition. The Index and commentary may not be used or relied upon by any other party or for any other purpose; Mercer is not responsible for the consequences of any unauthorized use.

The future is uncertain, and a plan's actual experience will likely differ from assumptions utilized and these differences may be significant or material. Decisions about benefit changes, investment policy, funding amounts, benefit security and/or benefit-related issues should be made only after careful consideration of alternative future financial conditions and scenarios and not solely on the bases of the index.

We have not included an estimate of actuarial and other professional or administrative fees that are incurred during a plan termination in estimating the relative cost of purchasing annuities. Due to the large number of regulatory filings and the high level of scrutiny on plan census data and benefit calculations, professional fees for a termination or annuity buyout can be significant.

Circular 230: The information contained in this document (including any attachments) is not intended by Mercer to be used, and it cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code that may be imposed on the taxpayer.

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