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.

To discuss your plan’s unique circumstances, you can contact the Mercer team at AnnuityMailbox@mercer.com.

Key takeaways

Commentary on the Mercer US pension buyout index results for Q4 2019

  • The average cost of purchasing annuities from an insurer was 104.3% of the accounting liability, while the economic cost of maintaining the plan was 106.0% of the accounting liability. The economic cost reflects increasing future PBGC premiums, administrative costs and investment expenses which increase the economic cost of maintaining the liability.
  • During Q4 2019, the average insurance company annuity pricing rate increased by slightly less than the interest rate used to value the plan liabilities, resulting in the relative cost of a buyout increasing.
  • 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.

Market update

  • Pension risk transfer premiums were over $18 billion in the three quarters of 2019. We expect premiums placed in the full year 2019 would be around $30 billion. Mercer continues to be a market leader in pension de-risking transactions, advising plan sponsors and independent fiduciaries on over 40% of all deal volume transacted in the past three years.1
  • A jumbo transaction with Lockheed Martin Corp. settled for $1.9 billion in Q4. It seems that there is still an appetite from insurance carriers to transact on large deals going forward.

1 Source: 2016-2019 LIMRA reports and internal Mercer data

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. It is based on a hypothetical retiree population with a duration of 9 and accounting liability of $50 million, using the Mercer Yield Curve to value the accounting liability. In addition, the Index 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. 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.

Annuity pricing data from a number of leading US life insurance companies are used to compile the Index. These insurers include American General Life Insurance Co., American United Life Insurance Company, Massachusetts Mutual Life Insurance Co. (MassMutual), Metropolitan Life Insurance Co., Minnesota Life Insurance Co., Principal Life Insurance Co., Pacific Life Insurance Co., and Prudential Insurance Co. of America (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. Actual annuity pricing can vary significantly from these sample prices.

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For the current value of the Mercer US Pension Buyout Index and full information about the Index, including Methodology for preparation and Important Notices, please visit our website at: www.mercer.com/US-pension-buyout-index
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