Are more pension buyouts on the horizon? Possibly.

According the latest Mercer U.S. Pension Buyout Index, the cost of purchasing an annuity for retirees rather than keeping them in a defined benefit (DB) plan took a slight dip in June.

As of June 31, Mercer calculates the buyout cost dropped from 109.5 percent to 109.4 percent of the accounting liability. Meanwhile, the economic cost of retaining retirees fell from 108.5 percent to 108.2 percent of the accounting liability.

Consequently, the cost of annuitization relative to the economic cost of maintaining those liabilities remains relatively tight – roughly 1 percent – as of June. Therefore, according to Mercer, buyout premiums are currently attractive for sponsors when compared to the all-in retention costs that include PBGC premiums, administrative costs and investment expenses.

Plan sponsors, notes Mercer, have indicated they would rather wait until interest rates rise, which would subsequently lower buyout expenses. Yet Mercer points out that while the rise in interest rates did tamp down the absolute cost of a buyout, the margin of the buyout cost over the accounting liability remained broadly flat. Therefore, plan sponsors should not only consider interest rates but the cost relative to the liability and assets as well.

Mercer further observes that stronger equity returns in recent months coupled with a jump in yields on corporate bonds used in setting discount rates had resulted in an upswing in funding levels. That, in turn, reduces the potential cash and funded status impact of a buyout.

According to Mercer, the aggregate funded status of pension plans sponsored by Fortune 1500 companies climbed to an estimated 88 percent as of June 30, up from 74 percent at the end of 2012. These recent improvements in funding levels should push plan sponsors to act quickly if they are contemplating a buyout.

The monthly index uses annuity pricing data from leading life insurers, including American General, MassMutual, MetLife, Principal, Pacific Life, Prudential and United of Omaha. It’s designed to track the correlation between the accounting liability of a hypothetical traditional DB plan and two cost measures: the approximate total economic cost of keeping retiree obligations on the balance sheet of a company and the estimated cost of transferring those liabilities to an insurer.

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