August 2025 Pension Risk Transfer Pricing Update

Executive Summary

Recent news strongly suggests the Federal Reserve will cut interest rates before year-end. In turn, several shifts may occur in the global economy, leading to a decline in corporate bond rates. Annuity purchases are likely to be affected by this shift, as insurance carriers rely heavily on corporate bonds when pricing annuities. A reduction in interest rates increases liabilities which leads to higher annuity prices. While the magnitude of these changes is uncertain, there is a reasonable likelihood that annuity purchase interest rates will begin to decline as the rate cuts take effect.

Despite this projection for the end of 2025, annuity purchase interest rates have experienced minimal fluctuations in recent months, which has provided attractive opportunities for the Pension Risk Transfer (PRT) marketplace. Given the uncertainty around future market conditions, acting now is vital. Plan sponsors who move quickly can take advantage of current stability and avoid the risk of transacting in a more volatile period.

Strong equity performance and higher interest rates this past month lead to improvements in pension finances. Notably, annuity purchase interest rates this month have exceeded their respective 2024 averages. The recent favorable conditions have presented a strategic opportunity for plan sponsors to act while the environment remains supportive of pension de-risking efforts.

Stay tuned for October Three’s 2025 Mid-Year Pension Risk Transfer Report. This upcoming report features expanded market data and the results of a comprehensive survey of insurers active in the PRT space. It offers valuable insights into transaction activity during the first half of 2025 and provides an informed outlook on what to expect in the PRT market for the remainder of the year.

Pricing Update

As mentioned in the Pension Finance Update, stocks have delivered double-digit returns since the end of March. In addition to strong equity performance, favorable interest rates have also played a key role, positively influencing overall pension liabilities for defined benefit plans. As illustrated in the graph below, annuity purchase interest rates remained stable throughout the second quarter and continued to show little volatility into the third. Notably, annuity purchase interest rates remain attractive, with the duration 7 rate at 4.97% and the duration 15 rate at 4.82%, both exceeding their respective 2024 averages. This favorable environment has created another timely opportunity for plan sponsors. While the future of market stability remains uncertain, the current period of minimal volatility presents a strong case for prompt action. Plan sponsors are encouraged to act quickly and take advantage of this window while it lasts.

Historical Activity

Since the beginning of the third quarter, the 10-year treasury rate has averaged approximately 4.35%, while the 30-year treasury rate has hovered around 4.49%. These rates are closely aligned with the annuity purchase interest rates, the 10-year treasury correlating to the duration 7 rate, and the 30-year treasury corresponding to the duration 15 rate. Coinciding with this, both the 10-year and 30-year treasury rates have exhibited minimal volatility in the short term and have remained relatively stable in recent months. Despite the rate stability, insurers have not expressed high-capacity constraints so far this year, a notable contrast to previous years, which such feedback has typically surfaced by this point. This could mean a potential surge in market activity in the fourth quarter. Given the combination of steady rate and strong insurer participation, plan sponsors are encouraged to act fast while conditions remain favorable.

Annuity Costs Relative to GAAP

The graph below shows the spread between the annuity purchase price and the GAAP projected benefit obligation (PBO), also referred to as the accounting book value. This month, Annuity Plan 1’s spread saw an increase of 0.11% while Annuity Plan 2’s spread also saw a rise of 4.92%. As annuity purchase rates increase, purchase prices drop relative to the PBO. Please note that the PBO figures shown do not include future overhead costs—such as administrative expenses and PBGC premiums—that plan sponsors would incur by retaining participants in the plan.

Coming Soon: October Three’s 2025 Mid-Year PRT Market Report

Stay tuned for October Three’s 2025 Mid-year Pension Risk Transfer report. The report includes expanded market data and a survey of insurance companies in the PRT market. The survey provides market insights into PRT transactions in 1H 2025 as well as an outlook of what the second half of the year holds for the PRT market. If you would like to request a copy of the report, please contact Jisha Jose at jjose@octoberthree.com and we will send you a copy upon publication.

For additional information or inquires about the pension risk transfer marketplace, contact Mark Unhoch: munhoch@octoberthree.com.

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*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. Monthly annuity rates are determined by taking the average Duration 7 and Duration 15 interest rates provided from the insurers. Annuity Plan 1 was valued using the average of the Duration 7-year interest rates collected from insurers and Annuity Plan 2 was valued using the average of the Duration 15-year interest rates collected from insurers. 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.