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Annuity Purchase Update – November 2021

November Highlights

+ Plan Funding Status increased

  • Stock market returns were strong last month
  • Interest rates generally decreased
  • Most pension plans with an asset portfolio of 60% equities and 40% fixed income improved their funding status around 11% Year-to-Date

+ Annuity Purchase Costs decreased slightly for Annuity Plan 1 and increased for Annuity Plan 2.

  • Annuity purchase interest rates rose for Annuity Plan 1* and dropped for Annuity Plan 2*
  • Pension Risk Transfer activity and insurance company competition remains high this quarter. As some insurers are beginning to hit capacity restraints, we expect this to be more prevalent as the year goes on. It is crucial for plan sponsors to get started on their annuity purchase if there is a desire to purchase this year.
  • Annuity purchase cost for retirees has consistently been between 98% – 104% of the pension accounting value (GAAP PBO) Purchase Costs decreased slightly

Executive Summary

  • Annuity purchase interest rates have experience less volatility than 2020.
  • Some insurance companies are reaching capacity constraints and their calendars are being filled with placements in the fourth quarter. It is imperative to act immediately for plan sponsors wishing to complete an annuity purchase this year or early next year.
  • The American Rescue Plan Act of 2021 (ARPA) was passed and will increase funding relief for plan sponsors. However, if plan sponsors continue to contribute only their required minimum contributions, PBGC premiums will increase significantly.
  • PBGC premium rates have increased in 2021 and will once again increase in 2022. This raises plan maintenance costs and can make Pension Risk Transfer solutions even more appealing.

November 2021 Rates
Duration: 7 Years 15 Years
November Range Rate: 1.58% – 2.35% 1.94% – 2.50%
November Annuity Rate: 2.01% 2.19%
Change in Annuity Rate since prior month (basis points): +5 -9
Average Rate During 2020: 1.74% 2.05%
Change in Annuity Rate since 1/1/21 (basis points): +44 +27

September 2021 Plan Tracker
Plan: Plan 1 Plan 2
% Change in Annuity Purchase Price – YTD: -3.10% -4.36%
% Change in Annuity Purchase Price – Past Month: -0.35% +1.46%
% Annuity Purchase Price Exceeds GAAP PBO: 3.17% 9.13%
% Change in Annuity Purchase Price Exceeds GAAP PBO (basis points) – Past Month: -31 +7


Despite the persistence of the pandemic, it is clear that the outlook for plan sponsors in 2021 is remaining positive. Generally, plan funding statuses in 2021 have improved and annuity purchase prices have declined.

The ARPA act will provide significant funding relief to plan sponsors by increasing the interest rates used for minimum funding liabilities and increasing the amortization periods for shortfalls. However, plans that pay PBGC Variable Rate Premiums (VRPs) may experience substantial increases in PBGC VRPs as well, as PBGC liabilities are not impacted by ARPA.

As mentioned in the October 2021 Pension Finance Update, pension plan funding gained ground last month and still remains up for the year. The average duration 7 annuity purchase interest rates increased 5 basis points and average duration 15 rates decreased 9 basis point since last month as seen in the below graph titled Annuity Purchase Interest Rates.

Annuity purchase interest rates fluctuate over time exhibiting varying degrees of peaks and valleys.  This is evident in our graph below titled “Historical Annuity Rates”.  The 10 year treasury rates are included in the graph as they correlate with the duration 7 annuity purchase interest rates.  The 30 year treasury rates correlate with the duration 15 annuity purchase interest rates.  Plan sponsors should consider getting their data in order for a Pension Risk Transfer.  Implementing a Pension Risk Transfer strategy can help a plan sponsor fulfill organizational goals, including reducing volatility in financial disclosures due to volatile interest rates.

The spread of annuity purchase prices above the GAAP projected benefit obligation (PBO) is in line with historical averages.  We refer to GAAP PBO and accounting book value interchangeably.   In September 2021, the spread for Annuity Plan 1 is 3.56% and the spread for Annuity Plan 2 is 9.38% as seen in the below graph. An increase in annuity purchase rates generally lowers annuity purchase prices relative to accounting book value.  Keep in mind that the below PBO calculations exclude future overhead costs paid by plan sponsors to retain participants in the plan. Administrative expenses and PBGC premiums are examples of these overhead costs. Future overhead costs would narrow the spread, though the extent is plan specific.

This past year significant month-to-month cost volatility has persisted.  In the past month the annuity purchase price for Annuity Plan 1 decreased 0.50%  and Annuity Plan 2 decreased 0.82% as seen in the below graph. Timing an early entrance to the insurance market is a crucial part of the planning stage because of the consistent short-term volatility of annuity pricing. Sponsors can take advantage of favorable fluctuations in a volatile market by connecting with an annuity search firm early.

Additional Risk Mitigation Strategies to Consider

Annuity purchases for plan sponsors do not need to occur on an all-or-nothing basis. Many plan sponsors can benefit by purchasing annuities even for a susbset of plan participants. This is especially true for retirees with small benefit amounts. Plan sponsors pay PBGC premiums for participants that do not vary based on the size of the participant’s benefit. For retirees with small benefit amounts, the PBGC premium overhead burden is substantial and can be eliminated through an annuity purchase.

Have a pension risk transfer need but not sure where to start? See our article, What to Look for in An Annuity Search Firm.

October Three advises plan sponsors through every step of the Pension Risk Transfer (PRT) process. Through long established relationships with insurers in the PRT marketplace, October Three collects annuity purchase rates for Duration 7 years and Duration 15 years on a monthly basis. We have constructed two hypothetical annuity plans which have been valued using the latest mortality tables and mortality improvement scales. Annuity Plan 1 contains retirees only and has a liability duration of 7 years. Annuity Plan 2 contains 70% retirees and 30% deferreds and has a liability duration of 15 years. Using the collected annuity purchase rates and 2 hypothetical annuity plans, we have produced the following graphs representative of actual PRT market activity and the corresponding impact on pension plans.

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