By Paula Aven Gladych
In February, the cost of purchasing annuities for retirees in U.S. pension plans jumped to 110 percent of the accounting liability for the plan, according to the Mercer US Pension Buyout Index
In 2013, “we saw the cost rise slightly from 108 percent at year-end Dec. 31, 2012, to 110 percent as of Jan. 31, 2013, and remain at 110 percent as of February 28, 2013,” according to Mercer. “While discount rates used to value pension benefits rose slightly at month end January 2013, producing lower accounting liabilities, on average insurer pricing remained broadly flat during this period, resulting in a higher relative premium.”
In February, both accounting discount rates and average insurer pricing dropped slightly, leaving the relative premium broadly unchanged.
Mercer noted that its Index only shows a comparison of the buyout cost against the accounting liability of a pension plan. The true cost to the sponsor of meeting overall pension obligations will be higher than the accounting liability as the accounting liability does not make any consideration for ongoing pension plan management expenses, for example administration costs and PBGC premiums, which can add as much as 10 percent to the cost of a plan.
The Mercer US Pension Buyout Index allows plan sponsors
to see at a glance the relative cost of a buyout by an insurer of retiree liabilities of a defined benefit plan, and how that cost changes over time. As a result plan sponsors can quickly assess the approximate cost of the purchase of annuities.
Originally published on BenefitsPro.com