Defined benefit pension plan sponsors in the U.S. are facing increasing costs when de-risking through annuity buyouts, according to a new report by consulting firm Milliman Inc.
It found the estimated cost to transfer risk to an insurer increased in September to 100.1 per cent of a plan’s total liabilities, up from 96.9 per cent in August.
During the same period, the average annuity purchase cost across all insurers also increased to 103.1 per cent from 101.4 per cent, said the report, noting the competitive bidding process saved plan sponsors roughly three per cent in risk transfer costs as of Sept. 30, down from 4.5 per cent at the end of August.
“With the competitive retiree buyout cost back up to 100 per cent, the big question is what may have triggered this uptick,” said Mary Leong, a consulting actuary at Milliman, in a press release. “Potential factors include insurers having less appetite for interest rate risk or less assets available for transactions as we head into Q4. It will be interesting to see if this trend continues through year-end or if the buyout cost reverses direction again.”