June 2024 Annuity Purchase Update

According to LIMRA, a total Pension Risk Transfer premium of $14.6 billion was observed in the first quarter of 2024, marking a remarkable 130% increase compared to Q1 of 2023.

  • Market momentum continues to build in 2024 as we observed another significant transaction this year with Entergy Corp. offloading $1.16 billion in pension liability.

  • Jumbo transactions drove the sizeable premium growth in the first quarter, but the number of transactions hit a record high as well during the first quarter, as observed by LIMRA.

  • Historical observations indicate that insurers encounter capacity limitations in the last two quarters, highlighting the importance of entering the marketplace early to allow ample time for de-risking plans.

  • Annuity purchase interest rates slightly decreased this month; however they still rank among the highest seen so far in 2024.

For the first few months of 2024, annuity purchase interest rates remained stable, showing an upward trend trajectory, but have since started to present a steady decline. The Fed has also indicated that there may be 1-2 rate cuts in the coming months. As mentioned in the Pension Finance Update, this year, higher interest rates and robust stock market returns have brought more good news for pension sponsors. This month saw a marginal decrease in interest rates, with both the average duration 7 annuity rate and average duration 15 annuity rate dropping by 8 basis points. Despite the slight decrease, the rates for this month remain among the highest observed in 2024 thus far. The last two quarters emerge as the peak activity period in the pension risk transfer marketplace leading insurers to encounter capacity limitations or calendar conflicts. This should serve as a strong incentive for plan sponsors to mitigate their pension obligations as early as possible.

Annuity purchase interest rates experienced a minor decline this month, with the average duration 7 rate dropping to 5.04%, and the average duration 15 rate also decreasing to 4.92%. The spread between the 10-year treasury rate and 30-year treasury rate widened slightly, placing the two rates 14 basis points apart. Since the beginning of June, both the 10-year and 30-year treasury rates have decreased. Even though there was a slight decrease, favorable interest rates are still prevailing in 2024. This is causing the marketplace to remain busy, and insurers are preparing for the anticipated third and fourth quarter rush. It is highly encouraged to enter the marketplace early to secure favorable rates and maximize opportunity amid this dynamic market.

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 June, we observed that the spread between annuity purchase price above GAAP PBO for both plans narrow slightly. For Annuity Plan 2, the spread decreased to 4.33% above GAAP PBO, while for Annuity Plan 1 it decreased to 0.09% above GAAP PBO. An increase in annuity purchase rates inversely lowers 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. Future overhead costs would narrow the spread, though the extent is plan specific.

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. Since 2021, the average purchase cost was 101.00% of GAAP PBO. At the end of the first quarter of 2024, October Three Annuity services closed two placements below GAAP PBO. With attractive rates and aggressive pricing from carriers, one transaction closed at 97.25% of GAAP PBO and the other at 93.59% of GAAP PBO. Thus far, the 2024 average annuity purchase cost of retiree transactions placed by October Three Annuity Services is 99.29% of GAAP PBO.

Although the graph below shows a month-to-month fluctuation, annuity purchase costs fluctuate daily, and as we can see, this month reveals a small uptick in costs for both plans. The annuity purchase price increased for Annuity Plan 1 by 0.44% and increased for Annuity Plan 2 by 0.87%. Despite the rise in the annuity purchase prices for these hypothetical plans, they remain among the lowest we’ve witnessed so far this year. The sooner a plan sponsor enters the Pension Risk Transfer marketplace, the greater the opportunity to leverage favorable shifts within the annuity purchase interest rates and prices.

As we near the second half of the year, it’s evident that 2024 is shaping up to be a busy year for the pension risk transfer market. The favorable interest rates and market conditions of the past few months indicate opportune time for plan sponsors to undertake de-risking initiatives. Annuity purchases can be made selectively rather than all at once. PBGC premiums for participants remain consistent regardless of the size of their benefits. Therefore, plan sponsors should contemplate purchasing annuities for a portion of the retiree population with smaller benefits to guarantee PBGC savings.

Have a pension risk transfer need but not sure where to start? See our article, What to look for when comparing Annuity Search Firms.

*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.