The cost of maintaining a pension plan or purchasing annuities from an insurer increased in December, according to the latest Mercer U.S. Pension Buyout Index.
The Index tracks the relationship between the accounting liability for retirees of a hypothetical defined benefit plan and the estimated cost of transferring the pension liabilities or retaining the obligations on the balance sheet.
In December, the cost of purchasing annuities from an insurer increased from 108.4 percent to 108.5 percent of the balance sheet liability. The cost of maintaining the pension rose from 108.2 percent to 108.6 percent, in large part because of Pension Benefit Guaranty Corporation premium increases for plan sponsors.
According to Mercer, the annual per-participant PBGC premium is $50 to $57 in 2015 and $64 in 2016. Because of the increases, the cost of maintaining retiree liabilities on the books increased by 40 basis points and crossed the buyout threshold as of Dec. 31, 2013.
“This increase in retention cost makes buyout potentially very attractive to sponsors from an economic perspective,” the report found.
Interest rates and equity markets rose significantly in 2013, which factored in to the decrease in the cost of buying out a plan. The aggregate funded status of pension plans sponsored by S&P 1500 companies increased by more than 20 percent during 2013 to about 95 percent, up from 74 percent at the end of 2012.
Annuity pricing data from a number of U.S. life insurance companies was used to compile the Index, including American General, Massachusetts Mutual Life Insurance Company, MetLife, Principal, Pacific Life, Prudential and United of Omaha.