The costs for a company to hold onto its pension liabilities vs. shifting them to annuities were nearly identical in October, suggesting the time is right for employers to unload their defined benefit pension plans, according to the latest Mercer Pension Buyout Index.
The index found that the cost of buying out a pension plan by purchasing annuities had fallen to 108.3 percent of the value of liabilities. The cost of keeping the plan was 108.2 percent of the value. Rising interest rates throughout the year have reduced future unfunded liabilities while rising stock prices have raised pension fund assets, causing the costs to converge.
“The retiree buyout cost relative to the economic cost of retaining the liabilities decreased significantly during October to its smallest margin during 2013 at approximately 10 basis points,” Mercer said. “The current low margin when comparing buyout costs to the cost of retaining the liabilities is potentially attractive for sponsors who are prepared to act on the opportunity.”
Mercer reported last month that the funding of corporate pension systems had reached the highest level since 2008. The average company retirement plan of a Standard & Poor’s 1500 company was 91 percent funded at the end of October.
Many companies have been looking at removing pension liabilities from their books in a process called derisking. Mercer advised that companies considering such a strategy should be prepared to move quickly when market conditions are at the most optimal.
With the cost of buying out a pension plan essentially the same as continuing to run it, companies would be more likely to consider unloading the liabilities by purchasing annuities.
For its monthly Pension Buyout Index, Mercer uses annuity pricing data from a number of life insurance companies, including American General, MassMutual, MetLife, Principal, Pacific Life, Prudential and United of Omaha. Not all of the companies are used to compile each month’s index.