It is slightly cheaper for pension plans to retain the liabilities associated with their plan than to purchase annuities for retirees in a buyout of the plan.
According to the Mercer U.S. Pension Buyout Index for May, the cost of purchasing annuities rose from 109 percent in April to 109.5 percent of the accounting liability, while the economic cost of retaining the retirees remained at 108.5 percent of the accounting liability.
Comparing the cost of annuitization to the economic cost of retaining the liabilities indicates that the margin for buyout over the cost of retaining the plan continues to be relatively small, at about 1 percent as of May 2013, indicating that buyout premiums are currently attractive for sponsors when compared with all-in retention costs, according to Mercer.
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