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. The difference between these measures represents the potential cost savings that plan sponsors can achieve through a retiree buyout.

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Key takeaways

  • At the end of September, a hypothetical retiree buyout could cost 5.3% less than the economic cost of maintaining the liability for this sample plan


Commentary on the Mercer US pension buyout index results for Q3 2020

  • The hypothetical cost of purchasing annuities from an insurer was 99.9% of the buyout index accounting liability, while the economic cost of maintaining the plan was 105.2% 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.
  • Transactions can be structured to focus on small benefit retirees to generate even larger potential economic savings. Fixed per person maintenance costs are a larger proportion of their liability. In addition, insurers prefer these participants and often price them more aggressively.
  • 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.
  • Beginning June 2020, the index methodology has changed to focus on the most competitive insurers. This better reflects that in a real transaction, the final price paid is typically the lowest bid from among the safest possible insurers. The Buyout Index pricing to PBO ratio is now broadly in line with what we have seen in actual recent client transactions. The historical buyout index values have also been adjusted in the charts above to reflect the methodology change.

Market update

  • Buyout index liability discount rate decreased by 10 basis points over the quarter.
  • Buyout index annuity discount rate decreased by 36 basis points, causing the hypothetical annuity price to increase by more than the accounting liability increase over the quarter.
  • As spreads widened in the early months of COVID, insurer price dispersion increased as insurers reacted differently to volatility. This led to exceptional deal pricing in Q2 and Q3. While this dispersion has begun to narrow, it does illustrate how plan sponsors who are actively monitoring the market can capitalize on opportunities to remove pension liability at a lower cost.
  • Transaction volumes have begun to rebound from a COVID lull, with Q3 volumes more than doubling Q2. Q4 volumes are expected to be stronger still, signaling market volume of close to $20 billion or more for the year.

About the Mercer US pension buyout index

Published quarterly, 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 years and accounting liability of $100 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., Athene Annuity & Life 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:
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