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October 2022 Annuity Purchase Update

• Pension Risk Transfer market activity exceeded expectations in the third quarter, with the total market estimate for 2022 jumping from $40B to $50B.

• Pension funding status dipped last month as high interest rates offset the impact of the worst stock market returns observed thus far in the year.

• Annuity Purchase costs for Annuity Plan 1* and Annuity Plan 2* dropped significantly this past month, the lowest we have observed year to date.

• Average annuity purchase rates have increased over 270 basis points in the last twelve months – with the average duration 7 annuity purchase rate at 4.80% and average duration 15 annuity purchase rate at 4.75%.

• The liveliness of the Pension Risk Transfer market will likely carry into 2023 so plan sponsors should consider entering the market place sooner rather than later to exploit favorable pricing.

• The decade’s largest Pension Risk Transfer transaction closed this quarter in a total premium of $16 billion. 


As mentioned in the Pension Finance update, stock market returns were poor last month resulting in decreased plan funding status. However, surging interest rates offset the low returns. Average annuity purchase interest rates continued to climb this month. In the last twelve months, average rates skyrocketed over 270 basis points with the average duration 7 annuity rate at 4.80% and the average duration 15 annuity rate at 4.75%. The Federal Reserve has increased interest rates throughout 2022. Given there is no direct relationship between this jump in rates and annuity purchase interest rates, there is no guarantee that the Federal Reserve increasing rates will further reduce annuity purchase costs. Market activity has exceeded expectations. Year to date, there have been more than 230 placements totaling $45 billion in premium. Total market will likely surpass $50 billion in premium at the close of 2022. The market rush is expected to continue into 2023. It is crucial for plan sponsors to enter the market place sooner rather than later to exploit favorable pricing.

Year to date, we have observed an upward trend in annuity purchase interest rates and treasury yields. As seen in the graph below, rates today are the highest we have observed since 2016. Annuity purchase interest rates and treasury yield rates vary over time. The 10 year treasury rates correlate with the duration 7 annuity purchase interest rates. Similarly, the 30 year treasury rates correlate with the duration 15 annuity purchase interest rates. Given the rapid increase in rates and surge in market activity, a timely entry into the market place is critical for plan sponsors to receive favorable pricing. Implementing a Pension Risk Transfer strategy can help a plan sponsor fulfill organizational goals, including reducing volatility in financial disclosures due to volatile interest rates.

Top 3 ways PRT is lowering plan costs

The graph below displays the difference between annuity purchase price above GAAP projected benefit obligation (PBO). We refer to GAAP PBO and accounting book value interchangeably. In October 2022, the spread for Annuity Plan 1 and Annuity Plan 2 widened. The spread for both plans remains lower than twelve months ago. 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.

Annuity purchase cost can shift from month to month. Given the consistent increase in annuity purchase interest rates, we have seen a general downward trend in cost in 2022. Since last month, The purchase price for Annuity Plan 1 decreased 3.24% and Annuity Plan 2 decreased 5.66%. Since January 2022, the purchase price for Annuity Plan 1 dropped 20% and the purchase price for Annuity Plan 2 reduced by 32%. An early entrance to the insurance market is a vital component of the planning stage because of the consistent short-term volatility of annuity pricing. By connecting with an annuity search firm early on, plan sponsors can capitalize on favorable fluctuations in a volatile market.

Additional Risk Mitigation Strategies to Consider

Annuity purchases for plan sponsors do not need to occur on an all-or-nothing basis. Many plan sponsors can benefit by purchasing annuities even for a subset of plan participants. This is especially true for retirees with small benefit amounts. In 2022, we have seen an increase in the number of lift-out transactions. We expect to see even more the remainder of the year. Plan sponsors pay PBGC premiums for participants that do not vary based on the size of the participant’s benefit. For retirees with small benefit amounts, the PBGC premium overhead burden is substantial and can be eliminated through an annuity purchase. Retiree carveouts have controlled a vast majority of market activity in 2022 so we are expecting to see more plan terminations in 2023.

Have a pension risk transfer need but not sure where to start? See our article, What to Look for in An Annuity Search Firm.

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 two 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 includes 70% retirees and 30% deferred and has a liability duration of 15 years. 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.

What to Read Next

September 2022 Pension Finance Update

Pension finances slipped modestly in September, as the worst month of the year for stocks more than offset the impact of surging interest rates. Both model plans1 we track lost less than 1% last month; for the year, Plan A remains up almost 4%, while the more conservative Plan B is now down more than 1% through the first three quarters of 2022:

Contact Mark Unhoch

Mark is here to answer your questions on how our October 2022 Annuity Purchase Update can support your needs.

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