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 according to the Milliman Pension Buyout Index (MPBI). The historically low interest rate environment for annuities is fueling this cost increase. Milliman’s MPBI 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.
“Since April, accounting discount rates have dropped approximately 30%,” says Mary Leong, a consulting actuary with Milliman. There are many factors that go into the pricing of pension risk transfers (PRT) including the size of the potential transaction, the composition of the retiree base, the complexity of the deal, and the competitiveness of the market.
DB pension systems might be better off keeping the liability on their books by exploring the use of a cash flow matching strategy to defease the retired lives liability. Analysis performed by Ryan ALM estimates that cost savings of 15% to 20% are highly likely when compared to a PRT.