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The Mercer US Pension Buyout Index

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Mercer US Pension Buyout Index
Calendar31 March 2019

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 March 2019, as indicated by the Index below, the average cost of purchasing annuities from an insurer decreased from 104.5% to 104.1% of the accounting liability. During the same period, the economic cost of maintaining the plan remained relatively flat, increasing from 105.8% to 105.9% of the accounting liability. The economic cost reflects increasing future PBGC premiums, which increases the economic cost of maintaining the liability.

Commentary on the Mercer US Pension Buyout Index results for March 2019

  • The spread between average insurance company annuity pricing rate and interest rate used to value the plan liabilities narrowed resulting in the relative cost of a buyout decreasing 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 passed in 2016 provided for continuous increases in PBGC premiums starting in 2017. This change increased the economic cost of maintaining the liability, making the business case for de-risking through an annuity buyout more attractive. As a result, each year since 2016 has seen a growing buyout trend of purchasing annuities for small benefit retired participants which significantly reduces the expense associated with the defined benefit plan. More than half of the premiums placed were as a result of discretionary retiree-only annuity buyouts.
  • 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 plan sponsors while safeguarding the benefit security for plan participants. Since its inception over 300 clients globally have used the platform.

Market Update

  • Pension risk transfer premiums were over $27 billion in 2018, according to the LIMRA report. 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, based on the 2016-2018 LIMRA reports and internal Mercer data.
  • Expectations for rising interest rates drove 2018 buyout sales higher than the already high levels we have experienced over the past 5 years.
  • In early 2019, the IRS issued Notice 2019-18 allowing plan sponsors to offer temporary lump sum windows to participants who have already commenced benefits. Implications for the group annuity market are still unclear, but it is possible this event will further drive insurer competition should sponsors opt to settle retiree liability through temporary lump sum windows in lieu of annuity purchase.

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 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 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.

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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:
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