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2025 is starting off strong, with both the average duration 7 and average duration 15 annuity purchase interest rates increasing over 20 basis points since last month.
The number of plans terminating has increased over the last 2 years. We expect plan terminations to continue to increase due to the majority of plans being fully or overfunded.
The average duration 7 and duration 15 annuity purchase interest rates observed in 2024 were 4.72% and 4.69%, respectively.
As we enter 2025, the average duration 7 interest rate has risen by 29 basis points, while the average duration 15 rate has increased by 20 basis points.
With a strong start to 2025, it is important for plan sponsors to initiate the annuity purchase process and secure their spot with insurers early.
Insurers reported the highest volume of contracts ever sold in the first nine months of 2024, marking a record-breaking milestone for the industry.
We are kicking off 2025 with increases in both the average duration 7 and average duration 15 rates, which have both risen to 4.89%. This is an excellent start for 2025, as 4.89% exceeds the overall averages we saw for both rates in 2024. Since October 2024, we have witnessed steady improvement in rates overall. As noted in the Pension Finance Update, pension finances have been steadily improving, with most pension plan sponsors once again seeing better funding ratios. With rates starting off strong in 2025, now is the ideal time for plan sponsors to connect with an annuity search firm and begin the process of settling their plan’s liabilities to achieve their de-risking goals under optimal conditions.
Historical data indicate that annuity purchase interest rates and treasury yields fluctuate over time. As we begin 2025, we have recorded that the 10-year treasury rate has risen to 4.57%, while the 30-year treasury rate has climbed to 4.79%, which has caused the rates to widen 22 basis points apart. Since the beginning of the month, both the 10-year and 30-year treasury rates have increased. The higher rates suggest an opportune time for Plan Sponsors that want to take advantage of the favorable market conditions. Historically, the pension risk transfer market experiences its peak activity during the last two quarters, indicating that plan sponsors should take the initiative during the earlier months to secure their purchase and position themselves so they can exploit favorable pricing conditions.
Top 3 ways PRT is lowering plan costs
This past month, we observed that the Annuity Plan 1 spread increased to 0.62% while the Annuity Plan 2 spread also rose to 5.65%. The last few months show a stable spread for both hypothetical plans. In 2024, the average spread between annuity purchase price and GAAP PBO for Annuity Plan 1 was 0.31% and 4.41% for Annuity Plan 2. 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.
In 2023, the annuity purchase cost for retirees was, on average, 102.52% of the accounting book value. In 2024, the average annuity purchase cost of retiree transactions placed by October Three Annuity Services was 101.32% of GAAP PBO. Since 2021, the average purchase cost was 101.21% of accounting book value.
This month, annuity purchase prices for both Annuity Plan 1 and Annuity Plan 2 declined. The purchase price for Annuity Plan 1 fell by 2.00%, while Annuity Plan 2 experienced a decrease of 2.25%. Entering the insurance market early is vital during the planning stage, given the frequent short-term volatility in annuity purchase pricing. Plan sponsors who are terminating their pension plans can take advantage of favorable fluctuations and attractive rates by settling the retiree portion of their liabilities.
2024 was another outstanding year in the Pension Risk Transfer market. Annuity purchase rates have been steadily rising in recent months, and plan sponsors are making significant strides in de-risking their pension plans. Robust market activity prevented plan sponsors from completing transactions as we closed out the last month of 2024. Plan Sponsors should consider connecting with an annuity search firm and getting data in good order sooner rather than later to avoid the capacity constraint hurdles that will arise later in the year. Annuity purchases do not need to occur on an all-or-nothing basis, so to capitalize on favorable market conditions, a plan sponsor should consider purchasing annuities for a subset of the retiree population with small benefits. PBGC premiums for participants do not vary based on the size of the participant's benefit. Purchasing annuities for a subset of the population would guarantee PBGC 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 by the insurers. Annuity Plan 1 was valued using the average of the 7-year duration 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.