Mercer US Pension Buyout Index

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.

During September 2016, as indicated by the Index below, the average cost of purchasing annuities from an insurer increased from 104.9% to 105.3% of the accounting liability. During the same period, the economic cost of maintaining the plan decreased slightly from 105.9% to 105.8% of the accounting liability. The economic cost reflects recently-passed legislation increasing future PBGC premiums, which increases the economic cost of maintaining the liability.

Commentary on the Mercer US Pension Buyout Index results for September 2016

  • The spread between average insurance company annuity pricing rate and interest rate used to value the plan liabilities widened resulting in the relative cost of a buyout increasing compared to the prior month.
  • A plan sponsor's PBO basis, including accounting standard, mortality assumption, and discount rate methodology may impact the attractiveness of insurer pricing compared to plan's ongoing PBO.
  • Following the Society of Actuaries’ release of the new mortality table and mortality improvement scale many plan sponsors adopted new mortality tables to value their pension obligations. However, these new higher longevity expectations were likely previously recognized by insurers and have in general not affected the annuity purchase price. As such, a buyout is now significantly more attractive compared to the balance sheet liability. As plan sponsors recognize these longevity increases, the relative value of the economic liability compared to the balance sheet liability also decreases.
  • Legislation has been passed which increases PBGC premiums starting in 2017. This change increases the economic cost of maintaining the liability, making the business case for de-risking through an annuity buyout more attractive.
  • The Index also illustrates the variability of the buyout cost compared to the balance sheet liability over time. The ability to frequently monitor insurer pricing against pre-determined thresholds, and to be prepared for nimble execution, will help capitalize on varying market and insurer conditions.
  • Taking these factors into consideration, Mercer has introduced the Mercer Pension Risk Exchange. The Exchange enables plan sponsors to continuously monitor pricing and supports rapid execution of transactions in a more competitive pricing environment. Combined with a robust insurer due diligence process, this will help optimize the transaction economics for plans sponsors while safeguarding the benefit security for plan participants.

Market update for September 2016

  • Mercer continues to take a market-leading role in advising plan sponsors on jumbo buyout deals, having been the lead advisor in a recently-announced transaction to settle $2.5 billion in pension obligations. For further information, please go to the press release.
  • Based on the increased activity for elective buyouts, the market is still on track to get very close to the ~$14 billion of pension risk transfer sales experienced in 2015.
  • The first half of 2016 has seen pension risk transfer transactions totaling $2.2 billion in volume. Deal volume typically picks up towards the end of the year as more plan sponsors look to purchase annuities ahead of year end. We expect increased activity during the 4th quarter of 2016. Based on our discussions with annuity providers, we believe there is still a lot of capacity in the market for annuity transactions, and at favorable premiums, given that many insurance companies will want to ensure annual sales targets are met or exceeded.
  • Two additional insurers are considering entering the market, likely supporting retiree-only deals
  • An expected IRS update of the base mortality tables and projection factors that defined benefit pension plans must use to determine required contributions, PBGC variable-rate premiums, and minimum lump sums won’t take effect until the 2018 plan year. This delay in change may increase lump sum cash out, active / spin termination, and plan termination activities as plan sponsors take advantage of the lower cost before a possible increase.

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 I ndex shows the approximate long-term economic cost of retaining the retiree liabilities on a plan 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 held 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, American United Life Insurance Company, Massachusetts Mutual Life Insurance Company (MassMutual), MetLife, Minnesota Life Insurance Company, Principal, Pacific Life, Prudential and Voya (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.

 American General Life Companies American United Life Massachusetts Mutual Life Insurance Company
MetLife Prudential Principal
Massachusetts Mutual Life Insurance Company Prudential Voya Financial


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:

  • 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


  • 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 Mercer's Pension Discount Yield Curve and Index Rates in the US.
  • The buyout liability estimates were calculated by using the single discount rate (the average of the monthly quotations) applied to the same cashflows.
  • The accounting liability shown is assumed to be the Pension Benefit Obligation (PBO) under ASC-715.

Economic cost assumptions

Default risk cost 0.30%
Asset management costs 0.10%
Inflation 2.50%
Wage inflation 3.50%
Participants 700
Retiree age 72
Initial liability 50,000,000
Per participant admin $30.00

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