Many defined benefit (DB) plan sponsors are considering transacting a pension buyout in the near future. If so, they should make sure they’re not overestimating the cost of an annuity buyout.
That’s one of the insights from Mercer LLC which can be found in the current research report, “Taking the Next Step in Pension Risk Management: Planning to Move Ahead.” Three times over the past six years, Mercer has worked with CFO Publishing to study the latest trends in pension risk management among U.S. companies with DB plans. This year’s report is based on survey responses from 213 senior finance executives at companies whose DB plan assets exceeded $100 million. CFO Publishing also interviewed ten finance executives to flesh out the main findings from the survey.
In both the survey and interviews, CFO Publishing found that finance executives were certainly intrigued by the potential for annuities to move at least a portion of their DB liabilities off their books and into the hands of an insurer. In fact, 36% of them were considering taking that step either this year or next.
But what seemed to be holding many of them back was the lingering perception that the cost could be steep. The survey found that 87% of finance executives may be overestimating the cost of annuity purchases relative to their balance sheet liability, perhaps relying on historical “rules of thumb” about the relative cost of annuity purchases.
But the math behind the rules of thumb has changed. The Society of Actuaries recently published new mortality tables, documenting the fact that many of us are enjoying longer lives. As one CFO we interviewed noted, “The good news is that we’re all living longer.”
But then he adds, “The bad news is that we’re all living longer.” With the new actuarial tables, a company might find that its pension liabilities had suddenly been inflated overnight.
The plus side of the new SOA tables is that buyouts are now looking more attractive for sponsors. The premiums charged by an insurance company for a pension annuity haven’t changed much, in absolute terms. By extending the mortality figures and inflating total liabilities—that is, the amount that an annuity would have to cover—the SOA effectively has lowered the premium.
That’s according to calculations done by Mercer, which regularly tracks annuity costs in the Mercer Pension Buyout Index. So it may be a good time for CFOs to pull out their calculators and redo the math on annuity transfers. It can indeed be true that there’s no time like the present.
For the full report, visit http://www.cfo.com/research