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In March, annuity purchase interest rates dropped roughly 23 basis points since last month. Plan Sponsors also experienced pension funding challenges due to poor stock market returns and lower interest rates. Despite these challenges, plan sponsors should remain proactive, as rates are still above historical averages and insurers are pricing aggressively.
A Pension Risk Transfer can be a valuable cost-cutting strategy for plan sponsors, particularly by reducing PBGC premium expenses, which have nearly doubled over the past decade. By purchasing annuities for retirees with smaller benefits—such as those below $350 per month for plans not subject to the PBGC cap or below $1,050 for capped plans—sponsors can lower headcount and PBGC costs.
Annuity Purchase Interest Rates
In March, the average duration 7 annuity purchase interest rate and the average duration 15 rate were almost neck and neck at 4.70% and 4.71% respectively. The first two months of 2025 saw a steady upward trend in annuity purchase interest rates. However, we have observed the first decline of the year at roughly a 23-basis point decrease since the prior month for both rates. A decrease in annuity purchase interest rates corresponds to an increase in annuity purchase costs.
The annuity purchase cost for the all retiree Plan 1 (duration 7) increased by 1.32% and Annuity Plan 2 (duration 15) increased by 2.58% in the last month. Although we observed this recent slump in rates, it is important to note that over the last 12 months, annuity purchase rates have remained stable.
Historical Annuity Rates
As shown below, the 10-year Treasury rate, which correlates to the duration 7 annuity purchase rate has dropped to about 4.24%. Meanwhile, the 30-year Treasury rate which ties similarly to the duration 15 annuity purchase rate has dropped to 4.51%. However, since the start of March, both the 10-year and 30-year Treasury rates have seen some uptick. The Pension Finance Update, tells us pension funding suffered their worst monthly loss since 2022 due to low stock market returns and low interest rates. Despite the recent decline in annuity purchase interest rates, plan sponsors should not be discouraged from considering an annuity purchase for their plan because as shown below, annuity purchase rates still remain higher than historical averages. Annuity purchase rates remain in a favorable position, offering attractive pricing opportunities. Given the unpredictability of rates and pension funding status, plan sponsors are highly encouraged to connect with an annuity search firm to get data in order and identify a derisking strategy that aligns with their goals. This proactive approach ensures they are well-positioned to act when market conditions become favorable.
Annuity Costs Relative to GAAP
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. Looking at this past month, the spread for Annuity Plan 1 rose to 0.43%, while the spread for Annuity Plan 2 increased to 5.94%. In practice, we have observed insurance carriers pricing very aggressively. October Three Annuity services have observed retiree obligations settling between 94%-106% of GAAP PBO.
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.
A Pension Risk Transfer could be a major cost-cutting strategy for plan sponsors. One category of savings is PBGC (Pension Benefit Guaranty Corporation) premiums. Defined benefit plans must pay these premiums to protect their employees’ benefits on an annual basis. To no surprise, PBGC premiums have increased again in 2025, with the flat rate premium per participant at $106 and for underfunded plans, the Variable Rate-Premium per participant cap at $717. In the last decade, these premium rates have nearly doubled, making it very costly to maintain a defined benefit plan.
Implementing a Pension Risk Transfer strategy can reduce headcount, thereby lowering overall PBGC premiums paid by a plan sponsor. Premiums per participant do not vary based on the size of the participant’s benefit. So, at what benefit level is it more costly to keep a participant in a plan than to transfer the benefit to an insurance company? As mentioned in October Three’s PBGC Break-Even Point Analysis, purchasing annuities for a subset of retirees with smaller benefit amounts can be an effective strategy to reduce the plan’s PBGC premiums. Plan sponsors not impacted by the PBGC Variable Rate Premium Cap can save money by purchasing annuities for retirees with monthly benefits below $350. For those who are subject to the cap, purchasing annuities for retirees receiving less than $1,050 per month will help reduce expenses. The break-even point for plans paying the Variable Rate Premium but not subject to the cap, would fall between $350 and $1,050. Plan Sponsors should connect with an Annuity Search firm to assess PBGC premium expenses and uncover opportunities for cost savings. For a more in-depth understanding of the factors driving PBGC savings through annuity purchases, see here.
Tune in next month as we dive into the Department of Labor’s Interpretive Bulletin 95-1 (‘DOL 95-1’) – the formal fiduciary requirements a Plan Sponsor must perform when selecting an annuity provider.
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.