Mercer launched its U.S. Pension Buyout Index, which allows plan sponsors to see at a glance how much it would cost to have an insurer buy out their retiree liabilities from 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.
The index will be published monthly and will track the relationship between the accounting liability for a hypothetical frozen traditional defined benefit plan and the estimated cost of transferring those liabilities to an insurance company. Annuity pricing data from a number of leading U.S. life insurance companies is used to compile the Index, including American General, MetLife, Principal, Prudential and United of Omaha.
In December 2012, the estimated buyout cost for a plan comprised of retirees only was 108 percent of accounting liability. This was cheaper when compared to earlier in the year when costs were 113 percent of accounting liabilities, but has coincided with a decrease in funded status for many plans due to declining discount rates.
According to Mercer, it is important to remember that the Index only shows a comparison of the buyout cost against the accounting liability.
“In general, 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. These expenses should be factored in when comparing the costs of a potential buyout to the cost of retaining the plan,” Mercer noted.
Last year, both GM and Verizon shifted a portion of their pension obligations to Prudential.