Milliman Launches Index to Track Pension Risk Transfer Market

Actuarial and consulting firm Milliman has launched a pension buyout index that estimates the average cost of a pension risk transfer strategy. The firm said it created the Milliman Pension Buyout Index (MPBI) because plan sponsors considering a plan termination or de-risking strategy need to be able to monitor the annuity market, which continues to show strong growth.

According to the LIMRA Secure Retirement Institute, almost half of all defined benefit pension plans in the US are frozen, and eight in 10 defined benefit plan sponsors are very or somewhat interested in a pension risk transfer deal. And in 2019, there were a record number of contracts sold in both the buy-out and buy-in markets with total group annuity risk transfer sales reaching $30.5 billion for the year, an 8% rise from 2018. And LIMRA said it expects pension risk transfer sales to continue to grow in 2020.

“With an increase in activity in the pension risk transfer market in recent years, understanding the correlation between annuity pricing and pension liability is essential,” Mary Leong, a consulting actuary with Milliman, said in a statement. “Tracking annuity pricing rates will enable plan sponsors to approach a de-risking strategy armed with more information on cost trends in the market.”

The MPBI uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from insurers, to estimate the average cost of a pension risk transfer annuity de-risking strategy. The annuity pricing composites are provided by several major insurers, including Prudential, American United Life Insurance Company, AIG’s American General Life Insurance Company, Minnesota Life Insurance Company, and Pacific Life.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

According to the index’s most recent results, the estimated cost to transfer retiree pension risk to an insurer remained relatively flat during January, with costs edging up to 104.3% of a plan’s total liabilities from 104.2%. This means the estimated retiree pension risk transfer cost for the month is 4.3% more than those plans’ retiree accumulated benefit obligation (ABO).

The firm said the lack of MPBI movement in January was the result of discount rates and annuity purchase rates decreasing in parallel by 35 basis points each, which in turn kept the relative cost of annuities relatively flat.

Milliman said plan sponsors should note that the new index shows an average cost estimate, and that individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape. Additionally, specific characteristics in a plan’s design or participant population can affect the cost of a pension risk transfer, which could make settling pension obligations with an insurer more or less expensive than estimated.

Tags: Annuity, buy-in, buyout, LIMRA Secure Retirement Institute, MBPI, Milliman, Milliman Pension Buyout Index, Pension Risk Transfer

After forecasting a tidy $1.1 billion windfall for the next few years, Washington State Treasurer Duane Davidson urged state legislators last week to squirrel the money away in a rainy day fund, not spend it.

This would be better use of the proceeds in advance of a recession, he argued. He cited other potential financial drains, such as economic disruptions stemming from the coronavirus.

Davidson’s office forecasted $606 million in additional revenue through mid-2021, when the fiscal year ends. It also estimated a $536 million surplus for the biennial period stretching from July 2021 through June 2023. After that, Davidson cautioned lawmakers in a letter, the cash bonanza is unlikely to repeat.

“I want legislators to consider saving and preparing,” Davidson wrote in a blog post. “We need a better cash position in both the rainy day fund and the general fund’s ending fund balance to help us weather the next recession.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The financial officer also suggested some of the new money go toward paying down the state’s $11.2 billion unfunded liability to get its pensions to fully funded status. Washington—which has the sixth-highest debt per capita in the country—funds 69% of its capital budget with debt.

It’s not the first time Davidson has warned government officials against raiding the state coffers for immediate needs. In 2018, the treasurer called the state’s proposal to divert $700 million from a rainy day fund “unacceptable,” while some state senators argued the funds were necessary for school funding.

But Davidson compared Washington unfavorably with California, which proposed adding $5 billion that year to its own reserves.

“Even California is doing the right thing!” Davidson wrote. “We can too.”

The treasurer’s warning comes as the spread of the COVID-19 disease in Iran, Italy, and South Korea shocked global markets last week and sent all three major US stock indexes plunging into correction territory.

By Monday, US markets stabilized, though uncertainty remains. The S&P 500 index was up 4.6% during Monday trading, even as domestic incidents of the illness continued to tick upward. Four deaths in Washington state alone brought the total number of US casualties up to at least six people this week.

“While the state faces a number of pressing problems, I am concerned about the Legislature’s willingness to spend down fund balances and its lack of urgency to ready the state for the next economic downturn, which would occur any time,” Davidson wrote in the post.