Mercer launched its U.S. Pension Buyout Index, which allows plansponsors to see at a glance how much it would cost to have aninsurer buy out their retiree liabilities from a defined benefitplan and how that cost changes over time.

As a result, plan sponsors can quickly assess the approximatecost of the purchase of annuities.

The index will be published monthly and will track therelationship between the accounting liability for a hypotheticalfrozen traditional defined benefit plan and the estimated cost oftransferring those liabilities to an insurance company. Annuitypricing data from a number of leading U.S. life insurance companiesis used to compile the Index, including American General, MetLife,Principal, Prudential and United of Omaha.

In December 2012, the estimated buyout cost for a plan comprisedof retirees only was 108 percent of accounting liability. This wascheaper when compared to earlier in the year when costs were 113percent of accounting liabilities, but has coincided with adecrease in funded status for many plans due to declining discountrates.

According to Mercer, it is important to remember that the Indexonly shows a comparison of the buyout cost against the accountingliability.

“In general, the true cost to the sponsor of meeting overallpension obligations will be higher than the accounting liability asthe accounting liability does not make any consideration forongoing pension plan management expenses, for exampleadministration costs and PBGC premiums, which can add as much as 10percent to the cost of a plan. These expenses should be factored inwhen comparing the costs of a potential buyout to the cost ofretaining the plan.”