Annuity Purchase Update – April 2022

Annuity Purchase interest rates jump 60 basis points - the largest month-to-month increase we have ever observed.

• The average Annuity Purchase Interest rates are the highest since June 2019, with the average duration 7 rate at 3.14% and average duration 15 rate at 3.15%.

• The Pension Risk Transfer Market had a record first quarter and remains active with strong demands from Plan Sponsors requesting annuities.

• With the impactful jump in annuity purchase rates, the outlook for plan sponsors looks optimistic in 2022.

• Annuity Purchase Costs dropped significantly this month. The cost for Annuity Plan 1* and Annuity Plan 2* dipped roughly 4% and 6%, respectively.

• The spread of annuity purchase prices above the GAAP projected benefit obligation (PBO) is the narrowest we have observed in the last 12 months, with Annuity Plan 1 at 0.95% and Annuity Plan 2 at 5.67%.


Although plan funding status varied year to date, pension funding status improved at the close of the first quarter due to higher stock market returns and increased interest rates. As annuity purchase rates and treasury yield rates continue to rise, annuity costs have dropped significantly. This past month we observed the average duration 7 annuity rate increase 60 basis points. Similarly, the average duration 15 annuity rate jumped 42 basis points, putting the current annuity purchase rates at 3.14% and 3.15%, respectively – the highest we have seen in the last 12 months. The PRT market remains very active, with Plan Sponsors taking steps toward plan terminations at a record pace. Plan sponsors should begin preparing for an annuity purchase to exploit favorable pricing.

The ARPA act provided significant funding relief to plan sponsors by increasing the interest rates used for minimum funding liabilities and amortization periods for shortfalls. However, plans that pay PBGC Variable Rate Premiums (VRPs) may experience substantial increases in PBGC VRPs, as PBGC liabilities are not impacted by ARPA. With plan funding status improving and annuity purchase prices declining, it is likely that the outlook for plan sponsors will remain positive in 2022 as a result of higher interest rates suggesting an increase in the number of plan terminations.

Annuity purchase interest rates and treasury yield rates fluctuate over time with varying peaks and valleys. Year to date, both the 10 year and 30 year treasury rates have steadily increased. 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. Factoring in the increased PRT market activity, Plan sponsors should consider getting their data in order for a Pension Risk Transfer as early as they can. A timely entry into the marketplace has proven to be advantageous for plan sponsors to receive favorable pricing. 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.

Top 3 ways PRT is lowering plan costs

The spread of annuity purchase prices above the GAAP projected benefit obligation (PBO) is substantially lower than the historical averages. We refer to GAAP PBO and accounting book value interchangeably. In April 2022, the spread for Annuity Plan 1 is 0.95%, and the spread for Annuity Plan 2 is 5.67% as seen in the below graph. The spread has narrowed since last month and is the lowest we have seen in the last 12 months. An increase in annuity purchase rates generally lowers annuity purchase prices relative to accounting book value. Please note, 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.

As seen below, we observed month-to-month cost volatility through out the year. In the past month the annuity purchase price for Annuity Plan 1 reduced 3.84% and Annuity Plan 2 dropped 5.92%. 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% deferred 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.