Revised Mercer U.S. Pension Buyout Index Methodology Shows That Costs of Annuity Buyouts Could Be Less Than Accounting Liability

Nachrichtenquelle: Business Wire (engl.)
17.09.2020, 17:41  |  107   |   |   

Mercer, a global leader in redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being, and a business of Marsh & McLennan (NYSE: MMC), announces that the costs associated with annuity buyouts may be increasingly attractive, as Mercer data indicates that a hypothetical retiree buy-out transaction may cost 97.7% of the plan’s accounting obligations1.

The discovery comes following enhancements introduced by Mercer to its U.S. Pension Buyout Index (the “Index”). Originally launched in 2013, the Index tracks the relationship between the accounting liability for retirees of a 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 Index is a useful tool for plan sponsors and other pension plan stakeholders focused on strategic and cost-effective ways to de-risk pension obligations and plan for end-game scenarios.

The enhancements to the Index were made following Mercer research, which revealed several changes to market conditions:

- Competition – the number of insurers who compete for annuity and buyout transactions has doubled since 2012;

- Investments – insurer pricing is generally driven by the ability of insurers to source higher yielding, less liquid assets such as private credit and commercial mortgages. These investments are not typically held by pension sponsors but are a natural fit to back illiquid annuity buy-out liabilities held on the insurer’s balance sheet; and

- Mortality – insurers have evolved their mortality underwriting techniques to better assess mortality risk at the individual participant level. This may often lead to lower pricing especially for transactions with smaller benefits and/or where benefit accruals have been frozen for many years.

As of June 30, 2020, the new Index value was 97.7%, indicating that a hypothetical retiree buy-out transaction may cost 97.7% of the plan’s accounting obligations. Additionally, the Index estimates the long-term costs of maintaining these pension liabilities to be 105.2%, which reflects costs not included in accounting liabilities such as PBGC premiums, investment management and administration fees, and the risk associated with fixed income defaults and downgrades. This demonstrates potential economic savings from a buyout of 7.5% compared to holding liabilities for the long term.

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