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LIMRA reported that through Q3 of 2024, 530 buy-out contracts were finalized, reflecting a 10% increase from 2023 and setting a record for the highest number of buy-out contracts sold.
In 2024, the average duration 7 and duration 15 annuity purchase interest rates were 4.72% and 4.69% respectively.
In the fourth quarter, insurance carriers reached their capacity limits, prompting them to suspend taking on new transactions for the rest of the year. To ensure timely transactions, it’s essential for plan sponsors to contact a Pension Risk Transfer specialist early in the year.
Driven by attractive interest rates, the strong momentum from 2024 is anticipated to persist into 2025.
According to LIMRA, year-to-date single-premium pension risk transfer premiums have surged by 21%, reaching a notable of $39.9 billion. Despite the lower interest rates and market volatility experienced during the middle of the year, the pension risk transfer market has demonstrated remarkable resilience, largely fueled by the increase in high-value multi-billion-dollar deals observed this year. Since the start of Q3, we’ve seen rates begin to rise; however, this last month there was a slight decline, with the average duration 7 rate decreasing to 4.63% and the average duration 15 rates dipping to 4.69%. The Pension Finance Update noted that most pension sponsors are experiencing improved funding ratios again this year. The increased pension funding ratios are enhancing the strength in the marketplace creating more opportunities for pension plans to be in favorable positions to participate in transactions. As 2024 draws to a close, insurance carriers have started preparing for 2025. We highly recommend that plan sponsors reach out to an annuity search firm sooner rather than later to ensure they can achieve their de-risking goals in 2025.
Annuity purchase interest rates and treasury yields continue to fluctuate over time, reflecting ongoing variations in market conditions. In 2023, average annuity purchase interest rates were between 4.28% and 5.52%, while in 2024, they have ranged from 4.29% to 5.12%. As of the beginning of the month, the 10-year treasury rate decreased to 4.19%, while the 30-year treasury rate dropped to 4.36%, causing the spread between the rates to widen to 17 basis points. Since then, treasury rates have increased.
Top 3 ways PRT is lowering plan costs
The graph below shows the spread between annuity purchase price above GAAP projected benefit obligation (PBO). We refer to GAAP PBO and accounting book value interchangeably. In December, we observed that the Annuity Plan 1 spread increased to 0.22% while the Annuity Plan 2 spread narrowed to 4.30%. The last few months show a stable spread for both hypothetical plans. This offers valuable opportunities for plan sponsors to capitalize on cost savings and lock in favorable rates as they enter the marketplace. A decrease in annuity purchase rates inversely increases 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.
The graph below represents the annuity purchase price relative to GAAP projected benefit obligation (PBO) of the retiree cases placed by October Three Annuity Services since 2021. In 2023, annuity purchase cost for retirees was on average 102.52% of the accounting book value. As of December 1st, the 2024 average annuity purchase cost of retiree transactions placed by October Three Annuity Services was 101.26% of GAAP PBO, 25% of which placed below GAAP PBO. Since 2021, the average purchase cost was 101.18% of accounting book value.
Annuity purchase interest rates in 2024 have remained relatively stable, with fewer sharp dips and fluctuations compared to 2023. This month, the annuity purchase price increased for Annuity Plan 1 and Annuity Plan 2. We observed a larger month-to-month fluctuation in December than we did in November. Although the graph below illustrates month-to-month fluctuations, it is important to note that annuity purchase interest rates are influenced by the market and can vary daily. To mitigate this short-term volatility, a plan sponsor terminating their pension plan could settle the retiree portion of their liability to “lock-in” favorable rates.
As history has shown, the fourth quarter in the pension risk transfer marketplace is typically one of the busiest periods, with plan sponsors and insurance companies rushing to finalize transactions before the end of the year. It is important for plan sponsors to contact an annuity search firm early to secure a position and capitalize on opportunities. Despite the recent interest rate cuts by the Fed, the PRT market conditions still present excellent opportunities for plan sponsors to achieve their de-risking goals. Forecasting changes in the pension risk transfer market remains difficult and will continue to be so. We expect the strong market activity of 2024 to spill into 2025. It’s important to remember that annuity purchases can be made in stages, rather than all at once. Since PBGC premiums are not affected by the size of participants' benefits, plan sponsors may want to consider a retiree carve-out for those with smaller benefits to secure potential PBGC savings. Plan sponsors should engage with annuity search firms early to explore strategies for optimizing savings.
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.