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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- At the end of June, a retiree buyout costs 2.1% less than the economic cost of maintaining the liability for this sample plan, nearing a three-year high. (See green line below.)
- Growth in the annuity buyout market is being fueled in part by plan terminations. We have observed attractive pricing in the marketplace, and the 2019 Mercer/CFO Research survey indicates 63% of plan sponsors are planning to terminate their plan within the next five years.
Commentary on the Mercer US Pension Buyout Index results for Q2
- The average cost of purchasing annuities from an insurer was 103.9% 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 Q2 2019, the average insurance company annuity pricing rate decreased by slightly less than the interest rate used to value the plan liabilities, resulting in the relative cost of a buyout decreasing.
- 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.
- Pension risk transfer premiums were over $27 billion in 2018. We expect premiums placed in 2019 will be approximately $25-$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
- In July 2019, Mercer became the first consulting firm to offer Club Vita’s longevity risk reporting to its clients in the United States. As part of their five-year agreement, Mercer’s pension plan clients in the United States will have access to Club Vita’s proprietary longevity assumptions, analytics and reporting, which will improve value in pension risk transfer deals.
- 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.
- The 2019 Mercer/CFO Research survey indicated 63% of plan sponsors are planning to terminate their plan within the next five years. 70% of plan sponsors also indicated they were likely or very likely to purchase annuities for their retirees in the next two years.2
1 Source: 2016-2018 LIMRA reports and internal Mercer data
2 CFO Research and Mercer have been conducting this biennial defined benefit pension risk survey since 2011. As in past years, this year’s edition drew responses primarily from 155 senior executives including CFOs, CEOs, and finance directors, all based in the U.S. and representing a wide range of industries. Just over half the respondents represent organizations with annual revenue between $500 million and $5 billion.
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 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.
- 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 www.mercer.com/pensiondiscount
- 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%|
|Per participant admin||$30.00|
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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