Rising Discount Rates Push Pension Risk Transfer Costs Lower in April

Offloading retiree pension risk to an insurance company became less expensive in April, according to consulting and actuary firm Milliman, which tracks the cost of de–risking pension funds with its Milliman Pension Buyout Index.  

The firm estimated that in a competitive bidding process, average costs of a pension risk transfer declined to 101.1% of a plan’s accounting liabilities in April from 102.5% in March. At the same time, average annuity purchase costs among all insurers in Milliman’s index decreased to 104.1% from 104.7%. That means the competitive bidding process saved plan sponsors an estimated three percentage points, as of the end of April.  

 “April spelled good news for plan sponsors looking to de-risk, as the competitive buyout cost reached a 3% differential for the first time in nearly a year—highlighting the importance of managing a PRT project to maximize insurer interest,” said Jake Pringle, a principal in Milliman. 

However, PRT costs in April, at 104.1%, were still 240 basis points higher than two months earlier, when the costs were 101.7% of a plan’s liabilities. Additionally, PRT volume is down this year due to both market volatility and mixed court rulings on the transactions’ compliance with fiduciary duties under the Employee Retirement Income Security Act. 

Milliman’s index is based on the difference between the discount rates insurers report to price group annuities and the accounting discount rate used by plan sponsors. The discount rate in April rose by three basis points, while competitive annuity purchase rates increased by 20 basis points, according to Milliman. The firm attributed the decline in de–risking costs to the 17-basis–point difference. 

To gauge the estimated costs of de–risking a pension, the MPBI uses the FTSE Above Median AA Curve as its discount rate and annuity purchase composite interest rates from nine insurance companies. 

Related Stories: 

PRT Costs Rise in March, while Volumes Fall 

Market Volatility, Litigation Slow PRT Deal Flow 

Broad PRT Market Growth Continued in 2024 

Tags: discount rate, Jake Pringle, Milliman, Milliman Pension Buyout Index, MPBI, Pension Risk Transfer, PRT