During June, the estimated cost to transfer retiree pension risk to an insurer rose 70 basis points, from 103.9% of a plan’s total liabilities to 104.6% of those liabilities.
This is according to global consulting and actuarial firm Milliman, which recorded the rising cost in the latest results of its Milliman Pension Buyout Index (MPBI).
The MPBI monitors the annuity market for plan sponsors that are considering transferring retiree pension obligations to an insurer.
It uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from insurers, to estimate the average cost of a PRT annuity de-risking strategy.
The June results show that the estimated retiree PRT cost for the month is now 4.6% more than those plans’ retiree accumulated benefit obligation (ABO).
Discount rates in June also dropped 11 basis points compared to an 18 basis point drop for annuity purchase rates, resulting in an increase in the relative cost of annuities.
“Since April, accounting discount rates have dropped approximately 30%,” said Mary Leong, a consulting actuary with Milliman and co-author of the study.
“As insurers track the current fixed income market, annuity purchase rates have followed this trend, resulting in a historically low interest rate environment for PRT transactions,” she added.
Milliman noted that MPBI is an average cost estimate, and individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape.
Furthermore, specific characteristics in plan design or participant population can affect the cost of a pension risk transfer.
