The cost of purchasing annuities for retirees decreased slightly in June.
The Mercer U.S. Pension Buyout Index showed a drop from 109.5 percent to 109.4 percent of the accounting liability, while the economic cost of retaining the retirees also decreased from 108.5 percent in May to 108.2 percent in June.
Mercer's index allows plan sponsors to see at a glance the relative cost of a buyout by an insurer of retiree liabilities of a defined benefit plan, 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, which includes an allowance for the future expenses and risk margin needed to maintain the obligations.
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Annuity pricing data is gleaned from U.S. life insurance companies, including American General, Massachusetts Mutual Life Insurance Company, MetLife, Principal, Pacific Life, Prudential and United of Omaha.
The cost of annuitization relative to the economic cost of retaining the liabilities continues to be relatively small at about 1 percent for June, indicating that buyout premiums are currently attractive for sponsors when compared with all-in retention costs, Mercer found.
Reviewing total retention costs in a more comprehensive way illustrates that annuity purchases may be a cost-effective risk transfer option for many sponsors, either today or when their plans become better funded.
While the premium of buyout cost to accounting liability has remained stable, strong equity returns in recent months, along with the increase in the yields of corporate bonds used in setting discount rates, have led to a significant rise in funding levels for many sponsors, reducing the potential cash and funded status impact of a buyout. The aggregate funded status of pension plans sponsored by S&P 1500 companies increased to an estimated 88 percent as of June 30, up from 74 percent at the end of 2012.
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