During December 2014, the average cost of purchasing annuities from an insurer to cover pension liabilities decreased from 109.0% to 105.3% of the accounting liability, according to the Mercer U.S. Pension Buyout Index.
The buyout index reflects that many plan sponsors are using a new mortality assumption to measure the balance sheet value of their pension obligations, in response to the Society of Actuaries’ publication of the RP-2014 mortality table and MP-2014 mortality improvement scale last October. This update increased balance sheet liabilities and decreased both the cost of buying an annuity as a percentage of the projected benefit obligation (PBO) and the economic cost of maintaining the plan as a percentage of the PBO.
Mercer explains that, following the Society of Actuaries’ release of the new mortality assumptions, many plan sponsors adopted them to value their pension obligations; however, these new longevity expectations were previously recognized by insurers and have in general not affected the annuity purchase price. As such, the buyout cost as a percentage of projected benefit obligations is more attractive.
Similar to the decrease in buyout cost, as plan sponsors recognize these longevity increases, the relative value of the economic liability compared with the balance sheet liability also decreases. The index shows that the economic cost of maintaining the liability decreased from 108.7% to 105.5% of the accounting liability.
Mercer says the index also illustrates the variability of the buyout cost compared with the balance sheet liability over time. The ability to frequently monitor insurer pricing against predetermined thresholds, and to be prepared for nimble execution, will help sponsors capitalize on varying market and insurer conditions.
Mercer advocates an ongoing custom buyout monitoring process for pension plan sponsors interested in these opportunities, combined with a robust insurer due diligence process. This will ensure the best economics for plan sponsors while safeguarding the benefit security for plan participants.