The Mercer Global Pension Buyout 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 index shows there continued to be country-specific periods of time – often only weeks – where more favourable terms were 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.
“Insurer pricing has largely withstood volatile markets but there have been substantial monthly fluctuations in pricing in some markets relative to local accounting measures,” said Frank Oldham, global head of DB risk at Mercer. “This underlines the need for the managers and sponsors of defined benefit plans to be prepared and to monitor insurer pricing against pre-determined thresholds on a frequent basis so that they can move quickly when pricing does soften for their plan.”
The Canadian landscape
Canada saw a wide fluctuation in relative pricing of annuities throughout 2014. The buyout premium stood at 105 per cent of plan liabilities in December 2013 and dropped to 103 per cent 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 per cent, due to changes in credit spreads and more conservative pricing from insurers. However, the market was still active throughout 2014, with approximately $2.5 billion of bulk annuities placed. This exceeded the previous record of $2.2 billion in 2013.
Mercer forecasts growth in the demand for bulk annuities as plan sponsors continue to look for ways to reduce their pension risk.
In March, the first ever Canadian pension longevity swap was announced. Though this deal did not involve an annuity purchase, at $5 billion it is the largest pension risk transfer ever transacted in Canada and is indicative of a growing trend to reduce the risks associated with pension liabilities.
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The Mercer Global Pension Buyout Index shows the cost of estimated annuity prices from insurers as a percentage of accounting liability in each of the five countries. Local market factors also play a role.