Mercer US pension buyout index

The Mercer1 US Pension Buyout Index (the “Index”) is designed to track 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.

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

Key takeaways

  • At the end of March, a hypothetical retiree buyout could cost 4.1% less than the economic cost of maintaining the liability for this sample plan.

1Investment management and advisory services for US clients are provided by Mercer Investments LLC (Mercer Investments), which is one of several, associated legal entities that provide investments services to clients as part of a global investment advisory and investment management business (collectively referred to as “Mercer”).Mercer Investments LLC is registered to do business as “Mercer Investment Advisers LLC” in the following states: Arizona, California, Florida, Illinois, Kentucky, New Jersey, North Carolina, Oklahoma, Pennsylvania, Texas and West Virginia; as “Mercer Investments LLC (Delaware)” in Georgia; as “Mercer Investments LLC of Delaware” in Louisiana; and “Mercer Investments LLC, a limited liability company of Delaware” in Oregon

 

Commentary on the Mercer US pension buyout index results for Q1 2022

  • The hypothetical cost of purchasing annuities from an insurer was 100.7% of the buyout index accounting liability, while the economic cost of maintaining the plan was 104.8% 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 help 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.

Market update

  • Buyout index liability discount rate increased by 106 basis points over the quarter.
  • Buyout index annuity discount rate increased by 104 basis points, causing the hypothetical annuity price to decrease by slightly less than the accounting liability decreased over the quarter.
  • Market volume has remained high to begin 2022, led by two transactions above $1 Billion each.  Additionally, multiple transactions in the $500M to $1B range has first quarter estimated volume in excess of $5 Billion, making it the highest Q1 on record.
  • Continued high levels of market transaction volume have driven ongoing expansion of the insurer market with two new entrants to the market in 2020 another in 2021 and at least one more in 2022.  This additional competition has been a positive for plan sponsors looking to transact.

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 Tower 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 quarter 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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