Pension Plan Annuity Purchase Update Q3 2023

Market Activity

Source: LIMRA Secure Retirement Institute

Pension buyout sales were very active in Q3 2023, especially for small to mid size transactions. 203 pension risk transfer buy out contracts closed in the third quarter, which is the highest quarter to date by number of transactions. This is up 40% by count from the third quarter last year. Year-to-date, there have been 483 buy out contracts transacted in 2023, compared to 362 buy out contracts through the same period last year.

While third quarter 2023 had a record number of contract sales, total buy outs by premium was down 69% from the third quarter of 2022. Third quarter premiums totaled $8.1B, compared to $26.1B from the same quarter last year. It should be noted that more than half ($16B) of the third quarter 2022 premium was attributable to a single transaction. If we ignore that one transaction, the third quarter premium for 2023 would be in line with last year, and year-to-date premiums would actually be higher.

What we’re seeing

Pension buyout activity has remained very active in the fourth quarter of 2023 after a strong third quarter. Some insurers reached capacity constraints, both in administrative and financial capabilities, and were unable bid on transactions they otherwise might have, leading to less competition between insurers. In fact, some insurers had to pull out of cases they had already agreed to bid on due to the volume in the marketplace. Despite there being less competition in some cases, pricing remains competitive. For retiree only cases, pricing continues to average 99% of the “fair” value of benefit liability1, while plan termination cases which include in-pay and deferred annuities average approximately 101%2.

Looking Forward

Plan terminations and retiree carveouts continue to remain attractive to plan sponsors in 2024. First quarter annuity purchases are already looking strong, despite being historically a slower quarter for pension risk transfer transactions.

Additional insurers are considering entering the pension risk transfer market in 2024. This would increase competition,  open up capacity, and drive attractive pricing for plan sponsors looking to derisk their pension plans in the future.

As part of the provisions of SECURE 2.0, the Department of Labor is reviewing the 95-1 guidelines. They are expected to deliver a report to Congress on or before December 29th, 2023.

[1] Measured using FTSE curve and best estimate of underlying mortality.
[2] Based on plan demographics and the mix of deferred and in-pay annuities.

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