Annuity Purchase Update: November 2019 Interest Rates

November 2019


7 Years

15 Years

7 Years

15 Years

Range Rate:

2.10% – 2.30%

2.37% – 2.60%

Average Rate:



Per our October 2019 Pension Finance Update, pension plans generally saw an increase in funded status during October. Also, the equity market has experienced tremendous returns during 2019 and these returns have largely offset liability growth due to drops in interest rates. As seen below, the average duration 7 and duration 15 annuity purchase interest rates increased by roughly 25 basis points since September 2019. This increase in rates since September led to a corresponding decrease in annuity purchase prices of almost 2% for Annuity Plan 1 and more than 4.5% for Annuity Plan 2.

The activity of plans purchasing annuities remained constant throughout 2019 and has dramatically increased in the fourth quarter. Insurance company resources are being utilized to capacity so plan sponsors will need to act quickly if there is intent to take action in 2019. During our experience in 2019, insurers have been aggressively pricing annuity purchases.

Annuity purchase interest rates fluctuate over time. History demonstrates the volatility of these rates with varying degrees of peaks and valleys. The last few months we’ve seen increases in annuity purchase rates. Does this mean we are seeing a trend upward? It may be too early to tell.

Historical rates show several instances where increases one month are followed by drops the following month. However, plan sponsors should consider getting their data in order for a Pension Risk Transfer in case the upward trend continues. 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) remained fairly stable during 2018. This spread was around 4% for Annuity Plan 1 and 12% for Annuity Plan 2. When annuity purchase interest rates and yield curve interest rates changed rapidly in December 2018 and throughout 2019, the spread fluctuated slightly up and down for both plans. From October 2019 to November 2019, the spread decreased less than 1%.

Relative to GAAP, we have seen that an increase in annuity purchase rates generally lowers annuity purchase prices. A narrow spread may represent an opportunity to settle an annuity purchase at a relatively cheaper price compared to a broad spread. 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, a significant month-to-month cost volatility has persisted. 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.

Looking ahead to future plan years, per our October Pension Finance Update, PPA funding relief will gradually sunset and this will generally lead to increased contributions from plan sponsors. Plan sponsors may wish to use these contributions to reduce the plan’s overall liability through use of a Pension Risk Transfer.

In 2020, the PBGC Flat-Rate Premium will increase to $83 per participant, the Variable-Rate Premium will increase to 4.5% of unfunded vested benefits, and the Variable-Rate Premium Cap will increase to $561 per participant. Per our 2019 PBGC Premium Burden Report, PBGC premiums remain a major threat to pensions, and continued attention to premiums should be a central part of viable pension management for the foreseeable future. Through use of a Pension Risk Transfer, plan sponsors can eliminate or significantly reduce future PBGC premiums.

In October 2019, the Society of Actuaries published (1) a new Mortality Improvement Scale MP-2019 and (2) new base Pri-2012 Mortality Tables. Both the MP-2019 and Pri-2012 will generally reduce defined benefit plan liability valuations marginally.

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 collects annuity purchase rates for Duration 7 years and Duration 15 years from several insurers on a monthly basis. We have constructed two hypothetical annuity plans: 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 two hypothetical annuity plans, we have produced the following graphs representative of actual 2019 Pension Risk Transfer market activity and the corresponding impact on pension plans.