Annuity Purchase Update – March 2022

Market volatility doesn't deter Plan Sponsors from derisking as the PRT market remains very active.

Executive Summary

• The Pension Risk Transfer Market is very active with strong demands from Plan Sponsors requesting annuities.

• Annuity Purchase Interest rates and Treasury yields jumped again since last month.

• The outlook for plan sponsors looks favorable as market activity and interest rates continue to rise.

• Annuity Purchase Costs dipped roughly 1% for Annuity Plan 1* and roughly 3% for Annuity Plan 2*.

• In 2021, the annuity purchase cost was consistently between 97% – 104% of the pension accounting value (GAAP PBO) for retiree cases placed by October Three Annuity services.


Thus far in 2022, interest rates and stock market returns have proven to be chaotic and volatile. As a result, plan funding status has varied throughout the first quarter. Despite these fluctuations, the PRT market remains very active with Plan Sponsors taking steps toward plan terminations at a record pace. We have observed annuity costs decline over the last few months. Just this past month, the duration 7 annuity rate increased 16 basis points, and similarly, the duration 15 annuity rate jumped 18 basis points putting the current annuity purchase rates at 2.54% and 2.73% respectively. 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 increasing the amortization periods for shortfalls. However, plans that pay PBGC Variable Rate Premiums (VRPs) may experience substantial increases in PBGC VRPs as well, as PBGC liabilities are not impacted by ARPA. With plan funding status improving and annuity purchase prices declining, 2021 proved to be a strong year for pension plans. Although plan funding status has varied in 2022, 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.

With variable levels of peaks and valleys, annuity purchase interest rates fluctuate over time. Over the last few months, both the 10-year and 30-year treasury rates have continued to increase. 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. 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 graph below represents the annuity purchase price relative to GAAP projected benefit obligation (PBO) of the actual retiree cases placed by October Three Annuity Services in 2021. We refer to GAAP PBO and accounting book value interchangeably. In 2021, the annuity purchase cost was consistently between 97% – 104% of the pension accounting value with an average of 99.5%. 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 fees.

As seen below, we observed month-to-month cost volatility throughout the year. In the past month, the annuity purchase price for Annuity Plan 1 dipped 1.06% and Annuity Plan 2 decreased 2.69%. 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 subset 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.