Annuity Purchase Update: September 2019 Interest Rates

There was a noticeable drop in annuity purchase interest rates in the first and second quarter of 2019. This trend has continued and annuity purchase interest rates fell again in September, although a significant increase was observed mid-September in the 10-year and 30-year treasury rates. The US Treasury rates increased roughly 50 basis points in September, which may signal a rise in annuity purchase interest rates. 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 impact of this volatility can be reduced by implementing Pension Risk Transfer strategies.

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 from December 2018 to September 2019, the spread fluctuated slightly up and down for both plans. 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. Examples of these overhead costs include administrative expenses and PBGC premiums. 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.

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 2 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 2 hypothetical annuity plans, we have produced the following graphs representative of actual 2018 Pension Risk Transfer market activity and the corresponding impact on pension plans.