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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.
The Buyout Index now reflects that many plan sponsors are using a new mortality assumption to measure their pension obligations, in response to the Society of Actuaries’ publication of the RP-2014 mortality table and MP-2014 mortality improvement scale last October. These updates increased pension liabilities and decreased the relative cost of buying annuities and plan retention costs.
During January, as indicated by the Index, the average cost of purchasing annuities from an insurer decreased from 105.3% to 104.1% of the accounting liability. During the same period, the economic cost of maintaining the liability was virtually unchanged at 105.7% of the accounting liability.
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). These additional costs 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 nine 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:
|Default risk cost||0.30%
|Asset management costs||0.10%|
|Per participant admin||$30.00|
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