Annuity Purchase Update: March 2021 Interest Rates

As interest rates continue to rise, the savings from purchasing annuities will also rise.

March Highlights

+ Plan funding ratio improved

  • Asset values improved

  • Interest rates rose

  • Most pension pans with an asset portfolio of 60% equities and 40% fixed income experienced around a 5% increase in funding ratio

+ Annuity purchase cost dropped

  • Annuity purchase interest rates rose

  • Insurance company competition increased

  • Most pension plans with a liability duration of around 10 would see about a 3% decrease in annuity cost this past month

  • Annuity purchase cost for retirees is 98% – 103% of the pension accounting value (GAAP PBO)

+ As interest rates continue to rise, the savings from purchasing annuities will also rise

Executive Summary

  • 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 minimum required contributions, PBGC premiums will increase substantially.

  • PBGC premiums have increased in 2021. This raises plan maintenance costs and can make Pension Risk Transfer solutions even more appealing.

  • Purchasing annuities for even a subset of plan participants would allow for plan sponsors to lock in the recent gains from increased interest rates and funding status.

March 2021 Rates


7 Years

15 Years

Range Rate:

1.70% – 2.36%

2.07% – 2.70%

Average Rate:



Average Rate Past Month Increase/Decrease:



Average Rate During 2020:



Average Rate YTD Increase/Decrease:



March 2021 Plan Tracker


Plan 1

Plan 2

Annuity Purchase Price – YTD:





Annuity Purchase Price – Past Month:





% Annuity Purchase Price Exceeds GAAP PBO:



% Annuity Purchase Price Exceeds GAAP PBO – Past Month:




Despite the persistence of the pandemic, it is clear that the outlook for plan sponsors is currently trending positively. Equity markets are strong and interest rates are rising. This will generally lead to improved plan funding statuses and decreasing annuity purchase prices.

The ARPA act will provide substantial 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 are paying PBGC Variable Rate Premiums (VRPs) will also experience substantial increases in PBGC VRPs as well, as PBGC liabilities are not impacted by ARPA.

The 4th quarter of 2020 further instilled the importance of beginning the annuity purchase process as early as possible. The plan sponsors that started the process early in 2020 were able to secure maximal insurer participation and obtain optimal pricing for their transaction.

As mentioned in the February 2021 Pension Finance Update, pension plan funding statuses improved in February. The average duration 7 annuity purchase interest rates increased 27 basis points and average duration 15 rates increased 30 basis point since last month as seen in the below graph titled Annuity Purchase Interest Rates.

Annuity purchase interest rates fluctuate over time with varying degrees of peaks and valleys. This is evident in our graph below titled “Historical Annuity Rates”. We are currently experiencing an upward trend in 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 March 2021, the spread for Annuity Plan 1 is 3.48% and the spread for Annuity Plan 2 is 9.67% 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 1.91% and Annuity Plan 2 decreased 4.74% 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

During these volatile times, one strategy plan sponsors have utilized is borrowing to fund their pension plan. The recent activities in the markets will negatively effect the funding status of plans and therefore may increase your plan’s PBGC Variable Rate Premium. In 2021, the PBGC Flat-Rate Premium has increased to $86 per participant, the Variable-Rate Premium has increased to 4.6% of unfunded vested benefits, and the Variable-Rate Premium Cap has increased to $582 per participant.

As part of managing a pension plan, sponsors should consider a borrow-to-fund solution for de-risking their plan. By borrowing to fund, plan sponsors can exchange volatile pension liabilities in return for a fixed low interest rate loan. The benefits this funding can have include reducing PBGC premiums and accelerating tax deductions, as well as allowing plan sponsors to focus more on their core business. Additional detail regarding the potential merits of a borrow-to-fund strategy can be found here.

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 2 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.