May 2026 Pension Risk Transfer Pricing Update

Executive Summary

As highlighted in the Pension Finance Update, pension finances rebounded strongly in April, driven by strong equity market performance. These market improvements not only offset losses experienced in March but also propelled pension finances to a new year-to-date high by month-end.

Interest rates have also continued to trend upward throughout April and May. High interest rates, combined with improved funded statuses, are creating favorable conditions for plan sponsors to settle all or a portion of their pension liabilities through de-risking strategies. Should these favorable trends persist, early engagement with an annuity broker will become increasingly important, allowing plan sponsors to maximize opportunities for achieving their de-risking strategies.

Many plan sponsors that have engaged in terminating their defined benefit plan have found that following a termination their plan retains surplus assets, creating an opportunity to generate additional value rather than viewing the excess as a liability. Depending on the plan’s funded status and objectives, sponsors may utilize surplus assets to enhance participant benefits, transfer assets to a Qualified Replacement Plan (QRP), or ultimately revert excess assets back to the employer. However, employers should note that surplus reversions are generally subject to significant excise taxes, which may be reduced if a portion of the excess assets are allocated to a QRP or used to provide benefit enhancements to participants. By evaluating surplus utilization strategies and related fiduciary, tax, and regulatory considerations early in the termination process, plan sponsors can maximize financial efficiency, support participant retirement security, and facilitate a smoother final pension risk transfer and plan termination process.

Pricing Update

An early entrance to the marketplace can be a key advantage when completing a Pension Risk Transfer (PRT) transaction due to the short-term volatility in annuity pricing. The earlier a plan sponsors can enter the PRT marketplace, the more likely plan sponsors can capitalize on favorable market movements and pricing opportunities. From April to May, both the duration 7 and duration 15 annuity purchase interest rates experienced positive upward movement. As illustrated in the graph below, the duration 7 rate increased to 4.94%, while the duration 15 rate rose to 5.02%. Both rates are currently sitting at some of the highest levels observed since June 2025. Additionally, the past two months have produced some of the most meaningful incremental increases seen in some time. Amid ongoing market uncertainty this year, these positive developments create an attractive environment for plan sponsors evaluating opportunities for their pension plans through the Pension Risk Transfer marketplace.

Historical Activity

So far in 2026, the 10-year Treasury rate has averaged around 4.24%, while the 30-year Treasury rate has averaged about 4.85%. Both rates are currently above their year-to-date averages, with the 10-year Treasury rising to 4.38% from the start of the month and the 30-year Treasury increasing to approximately 4.95%. These recent increases in both yields could help support favorable annuity pricing conditions, offering plan sponsors attractive opportunities to enter the Pension Risk Transfer marketplace. In addition, the significant improvement of pension finance levels during April has provided meaningful relief for many plans. Together, these market conditions present a valuable window of opportunity, particularly for those considering or already in the process of terminating their defined benefit pension plans.

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, the spreads of Annuity Plan 1 and Annuity Plan 2 widened slightly. For Annuity Plan 1, the spread is -0.18% while Annuity Plan 2’s spread is approximately 4.11%. 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.

Turning Pension Surplus into Opportunity After a Plan Termination

After conducting a plan termination, a plan sponsor may discover that their defined benefit plan holds surplus assets. Rather than having a pessimistic view and treating this surplus as a burden, a plan sponsor can treat the surplus as an opportunity. Depending on the plan’s funded status and provisions, plan sponsors may have several strategies available to them. These strategies can include increasing participant benefits, funding ongoing plan expenses, transferring assets to a Qualified Replacement Plan (QRP), or ultimately reverting surplus assets back to the employer.

One potential strategy a plan sponsor can utilize is the enhancement of participant’s benefits. Plan sponsors may approach the annuity provider to purchase increased benefits for those who had an annuity, whether immediate or deferred, purchased on their behalf. In addition, surplus assets can be allocated to participants who elected a Lump Sum during the termination through an additional Lump Sum payment. These strategies not only help reduce residual plan liabilities but also demonstrate a continued commitment to participant retirement security during the final stages of a pension risk transfer. In addition to enhancing participant outcomes, these benefit increases may also reduce the applicable excise tax on any eventual reversion. Under Internal Revenue Code Section (IRC) 4980, employer reversions are generally subject to a 50% excise tax. However, that rate may be reduced to 20% if certain conditions are satisfied, including qualifying benefit increases adopted in connection with the termination or the establishment of a QRP.

A QRP is generally a qualified retirement plan established or maintained by the employer in connection with the termination of the defined benefit plan. In practice, these are often defined contribution plans, such as a 401(k) plan, profit sharing plan, or other employer-sponsored qualified retirement arrangement that satisfies the applicable IRC requirements. To qualify for the reduced excise tax treatment, at least 25% of the potential reversion amount generally must be directly transferred into the QRP before any reversion occurs, and at least 95% of the active participants from the terminated plan who remain employed must participate in the replacement plan. Also, the transferred assets from a defined benefit plan to a QRP are generally subject to allocation timing requirements referred to as the “7-year rule.” Under the 7-year rule, transferred assets may either be allocated immediately or credited to a suspense account and allocated to participant accounts over a period of up to seven plan years.

Plan sponsors may also use surplus assets to satisfy remaining plan-related expenses associated with the termination process, including administrative, actuarial, and legal expenses to the extent permissible under the plan and applicable regulations. Evaluating these expenses carefully can help reduce the amount ultimately subject to excise tax treatment.

Following satisfaction of all participant liabilities and completion of any selected surplus utilization strategies, remaining excess assets may ultimately revert to the employer. While reversions can provide valuable liquidity and balance sheet benefits, they require careful coordination due to applicable income taxes, excise taxes, fiduciary considerations, and regulatory requirements. As organizations continue to evaluate pension risk transfer strategies, developing a thoughtful surplus utilization strategy early in the termination process can help maximize flexibility and value for both the company and plan participants while supporting a smooth path to final plan termination.

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

Submission box. If you want to see some topics covered, submit here

*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.