Mercer launched the Mercer U.S. Pension Buyout Index on Tuesday to provide pension plan executives monthly pricing information on purchasing annuities from insurance companies.
The index allows executives to see how the approximate cost of purchasing annuities changes and to compare it against factors such as administrative costs, PBGC premiums and the risks of holding onto liabilities.
“We want plan sponsors to be more comfortable with understanding the dynamics of insurance companies and give them a view of pricing levels,” said Sean Brennan, principal in Mercer's financial strategy group, in a telephone interview.
At the end of 2012, the buyout costs for retirees in a sample plan was 108% of accounting liability, down from about 113% the year prior. The index reached its lowest point in July following a decrease in the discount rate used to determine accounting liabilities after the downgrade of various bonds the previous month and the subsequent change in the yield curve. Annuity pricing data from several of the leading U.S. life insurance companies is used to compile the index.
Mr. Brennan said for some plans, the costs of administering the plan and paying PBGC premiums can be around 10%, or more expensive than the annuity premium.
Leah Evans, also a principal in Mercer's financial strategy group, said the consulting firm has seen “huge interest” from clients in looking at purchasing annuities as part of risk management plans.
The key factors for insurance companies that go into pricing are the level of yield and return the company can expect, longevity and mortality risks, capacity constraints and hedging against other risks, Mr. Brennan said.
Index results from the past year and the methodology behind it can be found on Mercer's website.