October 2024 Annuity Purchase Update
Despite the downward trend in annuity purchase interest rates, Plan Sponsors looking to derisk before year-end are rushing to market.
As anticipated, annuity purchase rates have decreased once more, with the average duration 7 rate decreasing 19 basis points and the average duration 15 rate dropping 11 basis points.
Despite the downward trend for annuity purchase interest rates, 2024 is poised to be one of the most successful years for total premiums in recorded history.
Robust Pension Risk Transfer market activity is driving insurers to become more selective regarding the transactions they choose to participate in.
Considering the uncertainty in annuity purchase interest rates, plan sponsors should proactively connect with an annuity search firm to formulate a strategy to achieve their derisking goals.
This past month, annuity purchase interest rates have dropped to the lowest level recorded since early 2023, however we've observed that rates have since bounced upwards since 10/1. The average duration 7 annuity purchase rate has dropped to 4.29% while the average duration 15 annuity purchase rate has decreased to 4.40%. As noted in the Pension Finance Update, pension finances saw a modest decline in September with lower interest rates increasing liabilities. As we near the end of the year, it is important for plan sponsors to note that insurers are likely to be more selective in the participation with new transactions in 2024 due to capacity constraints. This underscores the importance for plan sponsors to engage with an annuity search firm immediately to explore the best strategies for their plan. Whether that be jumping into the marketplace in 2024 or postponing a transfer until 2025, having conversations early is vital for maximizing plan sponsors’ chances of success.
Year-to-date, we have recorded an overall drop in both annuity purchase interest rates and Treasury yields. Historical trends show that annuity purchase interest rates and treasury yields fluctuate over time. The 10-year Treasury rate correlates with the duration 7 annuity purchase interest rate. Similarly, the 30-year Treasury rate aligns with the duration 15 annuity purchase interest rate. This past month we noted the 10-year Treasury dropped to about 3.74% while the 30-year Treasury rate decreased to 4.08%. Additionally, this last month we’ve recorded the spread of the 10-year treasury rate and 30-year treasury rate to be 34 basis points apart.
Top 3 ways PRT is lowering plan costs
The graph below shows the spread between annuity purchase price above GAAP projected benefit obligation (PBO). We refer to GAAP PBO and accounting book value interchangeably. This past month, the spread for Annuity Plan 1 increased to 0.23% and decreased to 4.38% for Annuity Plan 2. An increase in annuity purchase rates inversely lowers 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. Future overhead costs would narrow the spread, though the extent is plan specific.
The 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. Since 2021, the average purchase cost was 101.01% of GAAP PBO. At the start of the third quarter of 2024, October Three Annuity services closed two placements below GAAP PBO. Thus far, the 2024 average annuity purchase cost of retiree transactions placed by October Three Annuity Services is 99.89% of GAAP PBO. Despite the decrease in rates, the marketplace has been very busy and carriers continue to price aggressively.
Annuity purchase costs are constantly fluctuating from month-to-month. As you can see below, month-to-month price volatility decreased to 1.29% for Annuity Plan 1 and 1.08% for Annuity Plan 2. 2024 has mirrored the trend observed in 2023 with the last few months of the year displaying reduced volatility in annuity purchase cost. The last two quarters of 2024 are exhibiting the continued downward trend in annuity purchase rates, however we have seen rates increase since the start of the month. The timing for entering the Pension Risk Transfer marketplace is a critical part of the planning stage because of the short-term volatility of annuity pricing. As we approach the end of the year, plan sponsors should connect with an annuity search firm to secure optimal dates and make informed decisions on when to enter the marketplace.
Pension funding has taken some hits these last few months, and we anticipate rates to decline further. Moreover, historical trends suggest that volatile markets are likely before and after U.S. Presidential elections which could further disrupt the marketplace beyond the typical fluctuations. With that, annuity purchases can be made selectively rather than all at once. Since PBGC premiums for participants remain consistent regardless of benefit size, plan sponsors should consider purchasing annuities for a portion of the retiree population with smaller benefits to maximize PBGC savings. Now that insurers are cutting back on accepting specific purchases, retiree populations are a great start to enter the marketplace and secure participation.
*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.