September 2023 Annuity Purchase Update

Average Annuity Purchase interest rates hit record highs for 2023.

  • Average annuity purchase interest rates reached an all time high for the year with the average duration 7 rate at 4.94% and average duration 15 rate at 4.90%.

  • During the first half of the year, the pension risk transfer market experienced record-breaking volume in both premiums and transactions.

  • Pension Risk Transfer market activity remains robust as we close out the first half of the year over $22B in premium.

  • As we enter the busiest time of the year, insurance providers have expressed capacity limitations for the remainder of the year. Plan sponsors should act now to secure a spot in 2023 or early 2024.

Vigorous market activity of the first half of the year carried into the second half of the year. As mentioned in the Pension Finance Update, pension funding dipped this past month. However, annuity purchase interest rates hit a record high for the year with the average duration 7 annuity purchase interest rate at 4.94% and the average duration 15 annuity purchase interest rate at 4.90%. In the last month, the average duration 7 annuity rate increased by 16 basis points, while the average duration 15 annuity rate increased by 15 basis points. Appealing annuity interest rates have increased plan sponsors' appetite to de-risk defined benefit plans. At the close of the first half of 2023, market data indicates nearly 290 transactions totaling over $22 billion in premium - marking a record first half of the year. There are no indications of marketplace activity slowing down for the rest of the year. It is encouraged to connect with a plan sponsor to enter the marketplace sooner rather than later to lock down favorable rates in this active market.

Annuity purchase interest rates increased this past month. Average annuity rates have been fairly consistent thus far in 2023. In 2022, annuity purchase interest rates ranged from 2.09%-5.20% whereas in 2023, average annuity purchase interest rates ranged from 4.28%-4.94%. The spread between the 10-year treasury rate and 30-year treasury rate widened, placing the two rates 11 basis points apart. Thanks to favorable interest rates observed in 2023, market activity is booming. Insurers are experiencing capacity constraints given the volume of placements. Entering the marketplace in a timely manner is important in order to maximize savings.

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 September, we observed the spread between annuity purchase price above GAAP PBO for both plans narrow. For Annuity Plan 1, the spread decreased to 1.79% and Annuity Plan 2 experienced a dip to 3.69%. The current spread for both hypothetical plans are lower than the historical averages - 2.37% for Annuity Plan 1 and 6.6% for Annuity Plan 2. 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.

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. As we continue into the second half of the year, we will continue to see more placements at October Three. Since 2021, annuity purchase cost for retirees was on average 100.48% of GAAP PBO at October Three. We observed a range of 94.65%-106.27% of GAAP PBO.The vast majority of market activity occurred in the third and fourth quarters. This year, insurers have experienced a consistent rush which they anticipate will remain as we approach the last quarter of the year.

Annuity Purchase interest rates in 2023 have been less volatile than 2022. This month the annuity purchase price decreased for Annuity Plan 1 by .90% and 1.66% for Annuity Plan 2. Although the graph below shows a month to month fluctuation, annuity purchase interest rates are market dependent and actually fluctuate daily. To hedge against this short term volatility, a plan sponsor terminating their pension plan could settle the retiree portion of their liability to "lock in" favorable rates.

Additional Risk Mitigation Strategies to Consider

This year is on track to be a record year for the Pension Risk Transfer Market. As pension funding improves and annuity purchase costs become more attractive, the Pension Risk Transfer Market will continue to gain more traction. 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.