Market Activity
Pension buyout sales were very active in Q4 2023. In the fourth quarter, there were 280 buy out contracts sold, which is the highest quarter-to-date on record. Last quarter held the previous record at 203 buy out contracts. Fourth quarter single premium buy out sales by premium totaled $12.5 billion, up 73% from the 2022 fourth quarter premium.
For the year, 2023 also set a record for most pension risk transfer contracts completed with 850 contracts, up 26% from 2022. While 2023 had a record number of contract sales, total buy outs by premium was down 13% from 2022. Total 2023 pension risk transfer premiums were $45.8 billion, compared to $51.9 billion in 2022 (though it should be noted that the 2022 premium includes $16 billion from a single transaction).
What we’re seeing
Pension buyout activity has remained very active so far in 2024 after a strong 2023. Insurer interest is strong in the new year, and many plan sponsors are eager to de-risk. We expect the first quarter of 2024 to be the most active first quarter the PRT market has ever seen, with premiums more than double the previous Q1 record from 2023 of $6.3 billion. This is driven in part by two jumbo transactions that took place in Q1, each around $5 billion.
In 2024, there have also been a few class action lawsuits filed against plan sponsors who have recently purchased annuity contracts for their participants through pension risk transfers. We have not seen this affect insurer or plan sponsor appetite for de-risking.
Annuity purchase pricing remains competitive in 2024. 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. As a result, 2024 pension risk transfer activity is expected to remain strong throughout the year. Plan sponsors will do well to plan ahead, give the market enough time to schedule their transaction, and avoid the busy year-end rush when insurer capacity can dry up.
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 de-risk their pension plans in the future.
The Department of Labor is reviewing the 95-1 guidelines as part of the provisions of SECURE 2.0. Despite the initial expectation of delivering a report to Congress by December 29th, 2023, this timeline has been delayed. Nevertheless, we expect an update from DOL to be issued this year.
[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.