Milliman Launches Index to Track Pension Risk Transfer Market

Buyout index estimates cost to transfer retiree pension risk to an insurer.

Actuarial and consulting firm Milliman has launched a pension buyout index that estimates the average cost of a pension risk transfer strategy. The firm said it created the Milliman Pension Buyout Index (MPBI) because plan sponsors considering a plan termination or de-risking strategy need to be able to monitor the annuity market, which continues to show strong growth.

According to the LIMRA Secure Retirement Institute, almost half of all defined benefit pension plans in the US are frozen, and eight in 10 defined benefit plan sponsors are very or somewhat interested in a pension risk transfer deal. And in 2019, there were a record number of contracts sold in both the buy-out and buy-in markets with total group annuity risk transfer sales reaching $30.5 billion for the year, an 8% rise from 2018. And LIMRA said it expects pension risk transfer sales to continue to grow in 2020.

“With an increase in activity in the pension risk transfer market in recent years, understanding the correlation between annuity pricing and pension liability is essential,” Mary Leong, a consulting actuary with Milliman, said in a statement. “Tracking annuity pricing rates will enable plan sponsors to approach a de-risking strategy armed with more information on cost trends in the market.”

The MPBI uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from insurers, to estimate the average cost of a pension risk transfer annuity de-risking strategy. The annuity pricing composites are provided by several major insurers, including Prudential, American United Life Insurance Company, AIG’s American General Life Insurance Company, Minnesota Life Insurance Company, and Pacific Life.

According to the index’s most recent results, the estimated cost to transfer retiree pension risk to an insurer remained relatively flat during January, with costs edging up to 104.3% of a plan’s total liabilities from 104.2%. This means the estimated retiree pension risk transfer cost for the month is 4.3% more than those plans’ retiree accumulated benefit obligation (ABO).

The firm said the lack of MPBI movement in January was the result of discount rates and annuity purchase rates decreasing in parallel by 35 basis points each, which in turn kept the relative cost of annuities relatively flat.

Milliman said plan sponsors should note that the new index shows an average cost estimate, and that individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape. Additionally, specific characteristics in a plan’s design or participant population can affect the cost of a pension risk transfer, which could make settling pension obligations with an insurer more or less expensive than estimated.


Tags: , , , , , , ,