The cost of purchasing annuities from an insurer decreased to 108.3% of the value of transferred liabilities in October from 108.9% the previous month, according to Mercer’s U.S. Pension Buyout Index.
The decrease makes a buyout nearly identical to the economic cost of 108.2% to maintain the liabilities on the balance sheet. The economic cost takes into effect the total cost of maintaining a defined benefit plan, such as PBGC premiums and administrative expenses. The economic cost was flat from September.
The 10-basis-point spread between buyout and economic costs is the smallest margin in 2013.
Interest rates have risen significantly during the year, lowering the value of liabilities and decreasing the potential cost of a buyout. While rates dipped slightly in October, investment returns more than made up for it. The funded status of S&P 1500 companies at the end of October was 91%.
“For sponsors that wish to incorporate annuity buyout options to their strategic planning, the recent improvement in funding levels and the current small margin between the buyout and economic cost heightens the need to be prepared to act quickly,” according to the news release.