While 2014 saw the average cost of buying out a DB plan remain largely stable, there’s a growing trend to reduce the risks associated with pension liabilities, according to the Mercer Global Pension Buyout Index.
The average cost of buying out a DB pension plan remains largely stable relative to the value of accounting liabilities across five key DB pension markets.
The index tracks the cost of an insured annuity buyout relative to the corresponding pension accounting obligations in Canada, Ireland, the United States, the United Kingdom and The Netherlands. The Netherlands is notable as, unlike the other markets, the buyout index there has significantly decreased over 2014.
In Canada, a new record was set in 2014, with about $2.5 billion of bulk annuities placed, exceeding the previous record of $2.2 billion in 2013.
The index shows that there continued to be country-specific periods of time—often only weeks—where more favourable terms are on offer from insurers. Managers and sponsors of plans which have invested in improving their plan’s member and benefit data, assets, and governance structures are most likely to be able to benefit from these windows.
In Canada, the buyout premium stood at 105% of plan liabilities in December 2013 and dropped to 103% by June 2014.
In terms of the impact on corporate financial statements, the first half of 2014 appears to have been an opportune time for plans to complete a transaction. Relative prices then increased over the remainder of the year, moving towards 110%, due to changes in credit spreads and more conservative pricing from insurers.
Mercer expects growth in the demand for bulk annuities as plan sponsors continue to look for ways to reduce their pension risk.