The index is designed to help pension plan sponsors evaluate the relative cost of a buyout by an insurer of retiree liabilities of a defined benefit (DB) pension plan. It allows plan sponsors to see how the approximate current cost of the purchase of annuities changes over time and to evaluate the cost of a buyout against the administrative costs, Pension Benefit Guaranty Corporation (PBGC) premiums and risks of holding pension fund liabilities for retirees.
The index shows the estimated buyout cost for “Retirees Only” transfers on a monthly basis for a 12-month period beginning December 31, 2011. Pricing does vary over time, affected not only by interest rate movements, but also by insurance companies’ capacity and desire to take on additional liabilities.
“There are times when it’s cheaper to annuitize. But to act, plan sponsors need to understand how real-world pricing can change from month to month”, said Leah Evans, a principal in Mercer’s Financial Strategy Group.“The Mercer U.S. Pension Buyout Index will help plan sponsors understand cost trade-offs of a buyout versus the administrative expenses, PBGC premiums and risk factors of holding pension liabilities on their own books. When these factors are taken into account, annuitization may be attractive. Indeed, in some situations, the cost to buyout these liabilities through annuities may actually be lower than the accounting liability plus capitalized expenses. The reward may be a significant reduction in balance sheet risk. We think this tool will be a valuable resource to plan sponsors as they consider whether the buyout option is right for them and gauge the timing of such a transaction.”The Mercer U.S. Pension Buyout Index may be accessed at www.mercer.com/US-pension-buyout-index.