May 2025 Pension Risk Transfer Pricing Update

Executive Summary

We’ve seen a modest increase in annuity purchase interest rates as we progress through the second quarter of 2025. In light of recent market volatility and ongoing uncertainty, this upward movement is a positive development for the Pension Risk Transfer (PRT) marketplace.

Following the recent news of the temporary pause on major tariffs between the U.S. and China, markets have experienced a notable surge, further building on the momentum created by the earlier 90-day tariff extension decision. These developments present a timely opportunity for plan sponsors to enter the marketplace – whether to carve out a portion of retiree liabilities or pursue a partial annuity purchase. Given the market’s continued unpredictability, staying informed is critical. Engaging with an annuity search firm can provide plan sponsors with access to expert guidance and strategic insight, helping them navigate the evolving future of the marketplace and make informed, timely decisions.

Pension plans have experienced notable volatility in 2025, but recent market stability offers plan sponsors timely opportunity – particularly for those preparing to terminate their defined benefit pension plans or plans looking to de-risk. By proactively planning and identifying if the plan is overfunded, plan sponsors can turn excess assets into strategic value while enhancing retirement outcomes and potentially avoiding steep excise taxes.

Pricing Update

Annuity Purchase Interest Rates

Annuity purchase interest rates have experienced a modest increase as we near mid-2025. Despite the challenges and uncertainties that have shaped the Pension Risk Transfer Marketplace this year, the recent uptick – bringing the average duration 7 rate to 4.79% and the average duration 15 rate to 4.92% - offers plan sponsors a renewed opportunities to take strategic action. The Pension Finance Update reported that there were mixed results in April, as rising interest rates largely offset the negative impact of the declining equity markets. As noted last month, the 90-day tariff extension provides a limited window of opportunity for plan sponsors to engage in the market. With the deadline approaching quickly and potential volatility on the horizon, we encourage plan sponsors to act promptly to capitalize on advantages amid changes.

Historical Annuity Rates

Annuity purchase interest rates and Treasury yields continue to show volatility, reinforcing the importance of timely decision-making in a shifting marketplace. This month, the 10-year treasury rate increased to 4.25% while the 30-year treasury rate also jumped to 4.74%. Both the 10-year and 30-year Treasury rates have seen a marginal rise since the beginning of May. The duration 7 annuity purchase rate tracks closely with the 10-year treasury rate, while the duration 15 rate correlates with the 30-year treasury rate. The recent gradual rise in both yields may create favorable conditions for annuity pricing, offering plan sponsors an opportunity to enter the marketplace. With the 90-day tariff extension set to expire and potential market volatility ahead, plan sponsors are encouraged to connect with annuity search firms to develop a strategy to take advantage of this window.

Annuity Costs Relative to GAAP

The graph below illustrates the difference between the annuity purchase price and GAAP projected benefit obligation (PBO), which we also refer to as the accounting book value. Over the past month, the spread for Annuity Plan 1 rose to 5.06%, while the spread for Annuity Plan 2 experienced a slight decline, settling at 0.18%. 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.

Unlocking Value from Pension Surplus During Plan Termination

Pension finances have seen significant volatility in 2025, but recent market stability has provided a window of opportunity for plan sponsors—especially those considering or already in the process of terminating their defined benefit pension plans. In some cases, plans may now be overfunded.

A key strategy for sponsors is to assess pension funding status early in the termination process, not at the end. Understanding whether the plan is overfunded at the outset allows sponsors to explore ways to align surplus utilization with broader business goals.

Once all participant benefit obligations have been satisfied—through lump sums or annuity purchases—any remaining surplus may revert to the plan sponsor. However, this reversion is typically subject to a 50% excise tax, significantly reducing the value of the surplus.

To avoid this penalty, plan sponsors should consider cost-effective alternatives, such as enhancing participant benefits (as permitted by plan provisions), which can increase retirement security for plan participants. Another alternative is to utilize the surplus in funding a qualified replacement plan—such as a 401(k)—or retiree healthcare benefits, which may reduce or avoid excise taxes.

Waiting until the conclusion of a plan termination to discuss plan surplus could result in leaving money on the table. Addressing surplus considerations early in the plan termination process opens up opportunities that may not exist later. With proactive planning, excess assets can be transformed into strategic value—for both the business and its plan participants.

For additional information or inquires 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.