Annuity Purchase Update – May 2022

Annuity Purchase Update - May 2022

Executive Summary

• The average Annuity Purchase Interest rates are the highest we have observed, with the average duration 7 rate at 3.75% and average duration 15 rate at 3.76%.

• The Pension Risk Transfer Market had a record first quarter and remains active with insurance companies nearing capacity

• As interest rates continue to climb, strong demands from Plan Sponsors requesting annuities continue to increase as well.

• Annuity Purchase Costs dropped significantly since the beginning of the year. The cost for Annuity Plan 1* and Annuity Plan 2* dipped roughly 15% and 24% respectively.

• Now is an opportune time for plan sponsors to consider implementing a Pension Risk Transfer (PRT) strategy due to an upward trend in interest rates.


Although equity markets have dropped significantly, high interest rates offset the impact for pension plans sponsors. Despite market volatility, annuity purchase costs have declined substantially as annuity purchase interest rates hit record highs. The current average duration 7 annuity purchase rate is at 3.75% and average duration 15 rate is 3.76% – the highest we have ever observed. The average annuity rates have increased over 160 basis points since January 2022. The Pension Risk Transfer Market was very active in the first quarter, and activity remains high thus far in Q2 as insurance companies are beginning to hit capacity. Plan sponsors should begin preparing for an annuity purchase to exploit favorable pricing.

Annuity purchase interest rates and treasury yield rates fluctuate over time with varying levels of peaks and valleys. The 10 year treasury rate increased about 100 basis points and the 30 year treasury jumped about 70 basis points year to date. 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. Market activity is at an all time high. Since insurance companies are approaching capacity, Plan sponsors should consider getting their data in order for a Pension Risk Transfer as early as they can. A timely entry into the market place 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 graph below represents the spread between annuity purchase price above GAAP pojected benefit obligation (PBO). We refer to GAAP PBO and accounting book value interchangeably. In May 2022, the spread for Annuity Plan 1 slightly increased to 1.00%. Although it widened, the spread is still substantially lower than the historical averages. For Annuity Plan 2, the spread narrowed to 5.30%. This is the lowest we have witnessed 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, annuity purchase price varies from month to month. In 2022, we have observed a downward trend in cost. The purchase price for Annuity Plan 1 decreased 3.76% and Annuity Plan 2 dropped 7.89%. 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.