April 2025 Pension Risk Transfer Pricing Update

Executive Summary

Although annuity purchase interest rates saw a slight uptick since last month, pension funding took a downturn due to poor stock market returns. The initial tariff announcement triggered a sharp decline in rates at the start of the month, but the subsequent 90-day extension has driven a notable rebound. This shift presents a critical window of opportunity for plan sponsors to strategically carve out some or all their retirees.

Market uncertainties may be posing challenges for plan sponsors. In this shifting landscape, plan sponsors are encouraged to consult annuity brokers to identify alternative approaches to mitigate risk for their plans. Looking into 2025, market volatility may impact future trends in Pension Risk Transfer. However, LIMRA recently reported there was a 14% increase in single-premium Pension Risk Transfer sales in 2024, which was highly driven by strong first and third-quarter transactions, though sales did see a drop by 7% in Q4.

Plan Sponsors looking to de-risk should be mindful of current market conditions but prioritize fulfilling their fiduciary responsibilities. The Department of Labor’s Interpretive Bulletin 95-1 outlines fiduciary responsibilities for plan sponsors in selecting annuity providers for defined benefit plans, emphasizing a thorough evaluation of factors like financial stability and investment quality. A comprehensive approach helps plan sponsors protect participant’s interests and stay compliant with regulations.

Pricing Update

Annuity Purchase Interest Rates

As shown in the graph below, annuity purchase interest rates saw a modest increase last month. Since last month, the average duration 7 annuity purchase interest rate rose 6 basis points and the average duration 15 annuity purchase rate rose 17 basis points. As shown in the graph below, annuity purchase interest rates have been fairly stable thus far in 2025. In the first quarter, the average duration 7 and duration 15 annuity rates were roughly the same at 4.85%. As noted in the Pension Finance Update, pension sponsors faced challenges due to the decline in the U.S. stock markets during the first quarter and we are seeing this downward trend continuing into the second quarter of 2025. Additionally, underfunded plans may face increased required contributions in the years ahead. Given the recent funding losses, it is important for plan sponsors to evaluate the available opportunities and strategies to mitigate risk for their plans. The first step should be to consult with an annuity broker to assess and discuss the evolving market conditions and determine the most effective approach that will align with their plan’s needs.

Historical Annuity Rates

As shown in the graph below, 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. Annuity purchase interest rates have been relatively stable, and since the beginning of the month we have actually observed a slight increase in rates. The spread between the 10-year treasury rate and 30-year treasury rate started at 35 basis points but has since widened to 46 basis points. The graph below indicates that today’s rates are significantly higher than historical averages. The higher-than-average rates lead to another record year for PRT. LIMRA reported that single-premium PRT sales reached $51.8 billion in 2024, marking a 14% rise compared to 2023. The bulk of the success in 2024 can be attributed to the major transactions that took place in the first and third quarters. On top of that, the U.S. PRT market also achieved a new record of 794 single-premium contracts sold. LIMRA also explained in the 2024 fourth quarter a decline was observed, with single-premium buyout premiums dropping 7% compared to 2023, totaling $11.6 billion. Looking ahead into 2025, the market volatility has had a substantial impact on pension funding leaving plan sponsors uncertain of what is to come. Despite the recent challenges, plan sponsors could still have viable strategies and opportunities to de-risk their plans. It is highly encouraged for plan sponsors to still connect with annuity search firms to explore other options and tailor a de-risking approach that aligns with their objectives.

Annuity Costs Relative to GAAP

The graph below illustrates the difference between the annuity purchase price and GAAP projected benefit obligation (PBO), which we also refer to as the account book value. Over the past month, the spread for Annuity Plan 1 decreased to 4.91%, while the spread for Annuity Plan 2 saw a slight uptick, rising to 0.44%. A decrease in annuity purchase rates inversely increases 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.

The second graph below represents the annuity purchase price relative to GAAP projected benefit obligation (PBO) of the retiree cases placed by October Three Annuity Services since 2021. In 2023, annuity purchase cost for retirees was on average 102.52% of the accounting book value. In 2024 the average annuity purchase cost of retiree transactions placed by October Three Annuity Services decreased to 101.32% of GAAP PBO as the number of transactions and competition increased. Insurance carriers are pricing aggressively thus far in 2025 as October Three Annuity observed yet another placement closing under 100% of GAAP PBO. We're observing retiree transactions come in as low as 97% of GAAP PBO.

DOL 95-1 & Fulfilling Fiduciary Responsibilities

Plan Sponsors looking to de-risk and transition their plan liability to an insurer through a Pension Risk Transfer may be asking themselves many questions. What are the key considerations when selecting an annuity provider? Are we fulfilling our fiduciary responsibilities to our plan participants? The Interpretive Bulletin 95-1 (DOL 95-1), issued by the Department of Labor, outlines the formal fiduciary responsibilities under the Employee Retirement Income Security Act (ERISA) that a plan sponsor must follow when selecting an annuity provider for a defined benefit pension plan. Interpretive Bulletin 95-1 highlights that fiduciaries must prioritize the best interests and safety of plan participants. Rather than focusing solely on price and insurance ratings, a more thorough evaluation is required to meet these responsibilities. The DOL 95-1 “Safest Available Annuity” identifies the six key criteria to consider when selecting an annuity provider:

• Quality and Diversification of annuity provider’s investment portfolio.

• Size of the insurer relative to the proposed contract

• Level of the insurer’s capital and surplus

• Lines of business of the annuity provider and other indications of the insurer’s exposure to liability.

• Structure of annuity contracts and guarantees supporting the annuities such as the use of separate accounts

• Availability of additional protection through the state guaranty association and the extent of their guarantees.

Fiduciaries are obliged to thoroughly and objectively search for suitable insurance companies for annuity purchases. If lacking expertise in evaluating the DOL 95-1 factors mentioned above, fiduciaries must seek guidance from qualified, independent experts. Partnering with a qualified Annuity Consultant is crucial for a plan sponsor to fulfill their fiduciary responsibilities. A qualified Annuity Consultant not only understands the requirements outlined by DOL 95-1 but is able to explain the six complex criteria to the Plan Sponsor in an easy-to-understand way so a well-informed decision can be made. At October Three, we believe meeting fiduciary obligations involves much more than just reviewing the financials of various insurance companies. It requires partnering with a firm whose entire process—from start to finish—is intentionally built around fiduciary responsibility and the best interests of plan participants.

For additional information or inquires about the pension risk transfer marketplace, contact Mark Unhoch: munhoch@octoberthree.com.

Submission box. If you want to see some topics covered, submit here

*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 2 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 contains 70% retirees and 30% deferreds and has a liability duration of 15 years. Monthly annuity rates are determined by taking the average Duration 7 and Duration 15 interest rates provided from the insurers. Annuity Plan 1 was valued using the average of the Duration 7-year interest rates collected from insurers and Annuity Plan 2 was valued using the average of the Duration 15-year interest rates collected from insurers. 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.