The U.K. is the most expensive country for pension buyouts, according to a new buyout cost index created by Mercer.
The cost of insuring retiree obligations in the U.K. would be around 23% more than the equivalent accounting liabilities, vs. 17% in Ireland, 8.5% in the U.S. and 5% in Canada, according to the Mercer Global Pension Buyout index, based on data compiled in January.
Overall, the global index is at 13%.
The U.K.'s high cost is because of the country's legal requirement to automatically increase pension benefits in line with inflation, increasing liability durations. Also, costs in the U.K. and elsewhere are affected by regional market conditions.
Despite the cost, U.K. bulk annuities had a strong 2013 with an estimated 200 transactions. “The market in the U.K. grew without any strong drivers,” said Frank Oldham, senior partner and global leader of risk solutions for Mercer, in an interview. “We expect 2014 to be an even better year, in part because buyouts have been going on longer in the U.K. than elsewhere. (Buyouts have) been in play longer.”
In the U.S., higher mandatory contributions to the Pension Benefit Guaranty Corp. because of the federal budget agreement in December will increase the cost of retaining liabilities in 2014, making risk transfer even more attractive, Mr. Oldham said.
Bulk annuity sales in Ireland and Canada also are expected to increase in 2014, Mr. Oldham said — in Ireland because of pension funds being closed or frozen due to “deficit repair plans” mandated by the government last summer, and in Canada because of similar characteristics to U.S. plans.
This is the first buyout index by Mercer that combines the monthly indexes it calculates from each of the four countries, Mr. Oldham said. The indexes are derived from the pricings of a mix of insurers in the four largest markets for pension buyouts, he said.