The cost to buy out a U.S. pension plan increased slightly in August.
According to the Mercer US Pension Buyout Index, the buyout cost for retirees was 108.8 percent of the accounting liability of the plan. That was up slightly from July, when the Buyout Index stood at 108.7.
In comparison, it would cost 108.1 percent of the plan’s accounting liability to keep those retirees on the books. This percentage includes an allowance for future retention costs, like administrative, PBGC premiums and asset-related costs, as well as a reserve for future improvements in mortality, Mercer found.
The Mercer Index allows plan sponsors to see at a glance how much it would cost for an insurance company to buy out a defined benefit plan’s retiree liabilities and how that cost changes over time. It also shows the approximate long-term economic cost of retaining the retiree liabilities on a sponsor’s balance sheet.
Annuity pricing data is gleaned from leading U.S. life insurance companies, including American General, Massachusetts Mutual Life Insurance Company, MetLife, Principal, Pacific Life, Prudential and United of Omaha.
The retiree buyout cost relative to the economic cost of retaining the liabilities increased slightly during August but continues to be low, at approximately 70 basis points, indicating that buyout premiums are potentially attractive for sponsors when compared with all-in retention costs, Mercer said.
Interest rates have risen over recent months, leading to a decrease in the absolute cost of a buyout. This rise in interest rates continued in August, but was offset by a decrease in assets due to poor equity market performance. As such, the aggregate funded status of pension plans sponsored by S&P 1500 companies stood at an estimated 89 percent as of Aug. 31, up from 74 percent at the end of 2012. This rise in funding levels has reduced the potential cash and funded status impact of a buyout, according to Mercer.