Annuity Purchase Update: February 2019 Interest Rates

During 2018, the market experienced a favorable upward trend of rising interest rates which generally increased US defined benefit plan funding ratios. As interest rates climbed in 2018, plan liabilities dropped which led to a reduction in annuity purchase costs*. However, as interest rates began to drop in January and February 2019, annuity purchase costs began to increase along with plan liabilities.

Significant cost volatility persisted these past 12 months. The consistent short-term volatility of annuity pricing makes timing an early entrance to the insurance market a crucial part of the planning stage. By connecting with an annuity search firm early, sponsors can take advantage of favorable fluctuations in a volatile market.

Annuity purchase interest rates can be volatile. Although 2018 experienced an upward trend in annuity purchase interest rates, history demonstrates these rates fluctuate over time with varying degrees of peaks and valleys. The evident drop in rates in January and February 2019 may be the start of a new valley or a temporary deviation from the upward trend experienced in 2018. Sponsors can reduce the impact of this volatility on their balance sheet through Pension Risk Transfer strategies.

Have a pension risk transfer need but not sure where to start? See our article, What to look for when comparing Annuity Search Firms.

*October Three collects annuity purchase rates for Duration 7 years and Duration 15 years from several insurers on a monthly basis. We have constructed 2 hypothetical annuity plans. Annuity Plan 1 contains retirees only and has a liability duration of 7 years. Annuity Plan 2 contains 70% retirees and 30% deferreds 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 2018 Pension Risk Transfer market activity and the corresponding impact on pension plans.