Revised Mercer U.S. Pension Buyout Index Methodology Shows That Costs of Annuity Buyouts Could Be Less Than Accounting Liabil...
18 9월 2020 - 12:41AM
Business Wire
As the COVID-19 pandemic leads organizations to prioritize
cost savings, annuity buyouts could help plan sponsors with cost
savings and litigation risks in an uncertain economic
climate
Mercer, a global leader in redefining the world of work,
reshaping retirement and investment outcomes, and unlocking real
health and well-being, and a business of Marsh & McLennan
(NYSE: MMC), announces that the costs associated with annuity
buyouts may be increasingly attractive, as Mercer data indicates
that a hypothetical retiree buy-out transaction may cost 97.7% of
the plan’s accounting obligations1.
The discovery comes following enhancements introduced by Mercer
to its U.S. Pension Buyout Index (the “Index”). Originally launched
in 2013, the Index tracks the relationship between the accounting
liability for retirees of a defined benefit pension plan and two
cost measures: the estimated cost of transferring the pension
liabilities to an insurance company (i.e., a buyout) and the
approximate total economic cost of retaining the pension
obligations on the balance sheet. The Index is a useful tool for
plan sponsors and other pension plan stakeholders focused on
strategic and cost-effective ways to de-risk pension obligations
and plan for end-game scenarios.
The enhancements to the Index were made following Mercer
research, which revealed several changes to market conditions:
- Competition – the number of insurers
who compete for annuity and buyout transactions has doubled since
2012;
- Investments – insurer pricing is
generally driven by the ability of insurers to source higher
yielding, less liquid assets such as private credit and commercial
mortgages. These investments are not typically held by pension
sponsors but are a natural fit to back illiquid annuity buy-out
liabilities held on the insurer’s balance sheet; and
- Mortality – insurers have evolved
their mortality underwriting techniques to better assess mortality
risk at the individual participant level. This may often lead to
lower pricing especially for transactions with smaller benefits
and/or where benefit accruals have been frozen for many years.
As of June 30, 2020, the new Index value was 97.7%, indicating
that a hypothetical retiree buy-out transaction may cost 97.7% of
the plan’s accounting obligations. Additionally, the Index
estimates the long-term costs of maintaining these pension
liabilities to be 105.2%, which reflects costs not included in
accounting liabilities such as PBGC premiums, investment management
and administration fees, and the risk associated with fixed income
defaults and downgrades. This demonstrates potential economic
savings from a buyout of 7.5% compared to holding liabilities for
the long term.
The revised methodology is more in line with the experience of
the majority of Mercer clients who have executed retiree buy-outs
and achieved a transaction price near or often below the accounting
liability.
Jay Dinunzio, Principal in Mercer’s U.S. Financial Strategy
Group, said, “Over the past several years, pension plan sponsors
have shown a strong appetite for purchasing buyout annuities to
reduce their liabilities, with transaction volumes growing more
than 700% since 20132. As the COVID-19 pandemic has led many
organizations to prioritize cost savings during this time of
economic instability, we are confident that this trend will
continue into the future. As such, we believe that the enhancements
to the Mercer U.S. Pension Buyout Index more accurately reflect the
economic reality in which we are operating. While conventional
thinking is that these annuities are expensive and involve a higher
premium over accounting costs, our data and client experience show
that there can be significant cost savings when executed
properly.”
For more information on the Index:
https://www.mercer.us/our-thinking/wealth/mercer-us-pension-buyout-index.html
About Mercer
Mercer believes in building brighter futures by
redefining the world of work, reshaping retirement and investment
outcomes, and unlocking real health and well-being. Mercer’s more
than 25,000 employees are based in 44 countries and the firm
operates in over 130 countries. Mercer is a business of Marsh &
McLennan (NYSE: MMC), the world’s leading professional services
firm in the areas of risk, strategy and people, with 76,000
colleagues and annual revenue of $17 billion. Through its
market-leading businesses including Marsh, Guy Carpenter and Oliver
Wyman, Marsh & McLennan helps clients navigate an increasingly
dynamic and complex environment. For more information, visit
www.mercer.com. Follow Mercer on Twitter @Mercer.
About the Mercer US Pension Buyout Index
Published monthly, the 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 is based on a hypothetical retiree population with
duration of 9 and accounting liability of $50 million, using the
Mercer Yield Curve to value the accounting liability. In addition,
the Index shows the approximate long-term economic cost of
retaining the retiree liabilities on a plan sponsor’s balance
sheet. This economic cost includes an allowance for future
retention costs (administrative, PBGC premiums and investment
expenses). These additional costs are not included in the
accounting liabilities held by plan sponsors, but do represent
future costs that should be reflected in any risk transfer
comparison and evaluation. These costs will vary depending on the
specifics of each plan. Based on this evaluation, sponsors can
compare the approximate current cost of risk transfer through an
annuity purchase with the total cost of retaining obligations on
the balance sheet. The Index also illustrates the variability of
the buyout cost compared to the balance sheet liability over time.
The ability to frequently monitor insurer pricing against
pre-determined thresholds, and to be prepared for nimble execution,
will help capitalize on varying market and insurer conditions.
Annuity pricing data from a number of leading US life insurance
companies are used to compile the Index. These insurers include
American General Life Insurance Co., American United Life
Insurance Company, Massachusetts Mutual Life Insurance Co.
(MassMutual), Metropolitan Life Insurance Co., Minnesota Life
Insurance Co., Principal Life Insurance Co., Pacific Life Insurance
Co., and Prudential Insurance Co. of America (Mercer is not
associated with any of the aforementioned insurers). On a given
month the Index may be compiled from pricing data from some or all
of these insurers. Actual annuity pricing can vary significantly
from these sample prices.
________________________
1 Hypothetical calculations have not been realized, and similar
results are not guaranteed.
2 Source: Mercer pension risk transfer insurer sales survey data
from 2013-2019.
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version on businesswire.com: https://www.businesswire.com/news/home/20200917005741/en/
James Allan Office: +1 212 345 1315 Mobile: +1 917 657
5708 james.allan@mercer.com
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