Revised Mercer U.S. Pension Buyout Index methodology shows that costs of annuity buyouts could be less than accounting liability


As the COVID-19 pandemic leads organizations to prioritize cost savings, annuity buyouts could help plan sponsors with cost savings and litigation risks in an uncertain economic climate


New York, N.Y., September 17, 2020 – Mercer, a global leader in redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being, and a business of Marsh & McLennan (NYSE: MMC), announces that the costs associated with annuity buyouts may be increasingly attractive, as Mercer data indicates that a hypothetical retiree buy-out transaction may cost 97.7% of the plan’s accounting obligations[1].


The discovery comes following enhancements introduced by Mercer to its U.S. Pension Buyout Index (the “Index”). Originally launched in 2013, the Index tracks the relationship between the accounting liability for retirees of a defined benefit pension plan and two cost measures: the estimated cost of transferring the pension liabilities to an insurance company (i.e., a buyout) and the approximate total economic cost of retaining the pension obligations on the balance sheet. The Index is a useful tool for plan sponsors and other pension plan stakeholders focused on strategic and cost-effective ways to de-risk pension obligations and plan for end-game scenarios.


The enhancements to the Index were made following Mercer research, which revealed several changes to market conditions:


-          Competition – the number of insurers who compete for annuity and buyout transactions has doubled since 2012;


-          Investments – insurer pricing is generally driven by the ability of insurers to source higher yielding, less liquid assets such as private credit and commercial mortgages. These investments are not typically held by pension sponsors but are a natural fit to back illiquid annuity buy-out liabilities held on the insurer’s balance sheet; and


-          Mortality – insurers have evolved their mortality underwriting techniques to better assess mortality risk at the individual participant level. This may often lead to lower pricing especially for transactions with smaller benefits and/or where benefit accruals have been frozen for many years.


As of June 30, 2020, the new Index value was 97.7%, indicating that a hypothetical retiree buy-out transaction may cost 97.7% of the plan’s accounting obligations. Additionally, the Index estimates the long-term costs of maintaining these pension liabilities to be 105.2%, which reflects costs not included in accounting liabilities such as PBGC premiums, investment management and administration fees, and the risk associated with fixed income defaults and downgrades. This demonstrates potential economic savings from a buyout of 7.5% compared to holding liabilities for the long term.


The revised methodology is more in line with the experience of the majority of Mercer clients who have executed retiree buy-outs and achieved a transaction price near or often below the accounting liability.


Jay Dinunzio, Principal in Mercer’s U.S. Financial Strategy Group, said, “Over the past several years, pension plan sponsors have shown a strong appetite for purchasing buyout annuities to reduce their liabilities, with transaction volumes growing more than 700% since 2013[2]. As the COVID-19 pandemic has led many organizations to prioritize cost savings during this time of economic instability, we are confident that this trend will continue into the future. As such, we believe that the enhancements to the Mercer U.S. Pension Buyout Index more accurately reflect the economic reality in which we are operating. While conventional thinking is that these annuities are expensive and involve a higher premium over accounting costs, our data and client experience show that there can be significant cost savings when executed properly.”


For more information on the Index:



About Mercer


Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s more than 25,000 employees are based in 44 countries and the firm operates in over 130 countries. Mercer is a business of Marsh & McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 76,000 colleagues and annual revenue of $17 billion. Through its market-leading businesses including Marsh, Guy Carpenter and Oliver Wyman, Marsh & McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit Follow Mercer on Twitter @Mercer.


About the Mercer US Pension Buyout Index


Published monthly, the Index allows plan sponsors to see at a glance the relative cost of a buyout by an insurer of retiree liabilities of a defined benefit plan, and how that cost changes over time. It is based on a hypothetical retiree population with duration of 9 and accounting liability of $50 million, using the Mercer Yield Curve to value the accounting liability. In addition, the Index shows the approximate long-term economic cost of retaining the retiree liabilities on a plan sponsor’s balance sheet. This economic cost includes an allowance for future retention costs (administrative, PBGC premiums and investment expenses). These additional costs are not included in the accounting liabilities held by plan sponsors, but do represent future costs that should be reflected in any risk transfer comparison and evaluation. These costs will vary depending on the specifics of each plan. Based on this evaluation, sponsors can compare the approximate current cost of risk transfer through an annuity purchase with the total cost of retaining obligations on the balance sheet. The Index also illustrates the variability of the buyout cost compared to the balance sheet liability over time. The ability to frequently monitor insurer pricing against pre-determined thresholds, and to be prepared for nimble execution, will help capitalize on varying market and insurer conditions.


Annuity pricing data from a number of leading US life insurance companies are used to compile the Index. These insurers include American General Life Insurance Co., American United Life Insurance Company, Massachusetts Mutual Life Insurance Co. (MassMutual), Metropolitan Life Insurance Co., Minnesota Life Insurance Co., Principal Life Insurance Co., Pacific Life Insurance Co., and Prudential Insurance Co. of America (Mercer is not associated with any of the aforementioned insurers). On a given month the Index may be compiled from pricing data from some or all of these insurers. Actual annuity pricing can vary significantly from these sample prices.



[1] Hypothetical calculations have not been realized, and similar results are not guaranteed.

[2] Source: Mercer pension risk transfer insurer sales survey data from 2013-2019.