Mercer Ireland Pension Buyout Index
The Mercer Ireland Pension Buyout Index allows plan sponsors to see the relative cost of a buyout of pensioner liabilities of a hypothetical defined benefit plan versus the equivalent liabilities on a company accounts basis.
Commentary on the Mercer Ireland Pension Buyout Index for February 2015
- The costs of buying either traditional or sovereign annuities have both increased, compared to January’s figures, with the pensioner accounting liabilities of the sample plan also showing an increase.
- The impact of the changes in these costs means that, as at February 2015, the indicative buyout cost on a traditional basis for pensioners increased to just over 115% of the accounting liability. The indicative buyout cost on a fully sovereign basis has increased more sharply and is now equal to 112% of the accounting liability.
- The price differential between traditional and sovereign annuities is currently 3%, the lowest it has been since June 2014.
- As the level of discount available on sovereign annuities decreases, traditional annuity buyouts are increasing in popularity versus sovereign annuity buyouts.
Mercer has proven expertise in the area of bulk buyouts. Since 2011, our Bulk Annuity Quotes team has successfully placed in excess of €0.6bn of pension liabilities with insurers. For further information on the Buyout Index or annuity options for your plan, please contact your Mercer consultant.
About the Mercer Ireland Pension Buyout Index
The index is based on the pensioner population of a representative mature pension plan and uses monthly market pricing information. The index compares the cost of buying either traditional (also known as conventional) annuities or Irish sovereign annuities with the underlying accounting liability.
Sovereign annuities can provide trustees with a cheaper settlement option than traditional annuities but introduce an element of additional risk to the annuitant.
- This index is published monthly and is derived from market annuity pricing data provided by Irish Life. (Mercer is not associated with the aforementioned insurer.)
- The index is provided for the pensioner population of a sample plan and is indicative only. The pensioner profile of the sample plan is quite mature, with an average age of 70. The benefits secured (and valued as an accounting liability) are flat pensions, with no increases in payment.
- The price differential between purchasing annuities and the underlying accounting cost for a particular plan will also be affected by the nature of the assumptions adopted for the accounting disclosures. For larger plans, an analysis of the actual pensioner mortality may be of assistance if plan sponsors or trustees are considering purchasing sovereign annuities.
- The accounting liabilities are valued using the Mercer Yield Curve, which is used by leading Irish and multinational companies to set their discount rate for accounting purposes.
- The index compares the cost of buying out the pensioners of a plan against the accounting liability held for those members; it does not make any allowance for buy out costs for active or deferred members. Actual costs of completing a pensioner buyout will depend on scheme specific details and the prevailing market conditions at the point of settlement.
- A sovereign annuity differs from a traditional annuity in so far as it is linked directly to reference bonds that back the contract. Importantly, this means that pension payments will be reduced in the event of non-performance of some or all of the underlying reference bonds. This transfers the credit risk to the annuitant. All sovereign annuities presently available in the Irish market are backed solely by Irish Amortising Bonds (issued specifically for this purpose), although theoretically they could use bonds issued by any EU Member State.
The Mercer Ireland Pension Buyout Index and any related commentary has been created for illustrative purposes, is presented at a particular point in time and should not be viewed as a prediction of the hypothetical plan or a specific plan’s future financial condition. The Index and commentary may not be used or relied upon by any other party or for any other purpose; Mercer is not responsible for the consequences of any unauthorised use.
The future is uncertain, and a plan’s actual experience will likely differ from assumptions used and these differences may be significant or material. Decisions about benefit changes, investment policy, funding amounts, benefit security and/or benefit-related issues should be made only after careful consideration of alternative future financial conditions and scenarios and not solely on the basis of the Index.
We have not included an estimate of actuarial and other professional or administrative fees that are incurred during a plan termination in estimating the relative cost of purchasing annuities. Due to the high level of scrutiny on plan data and benefit calculations, professional fees for a termination or annuity buyout can be significant.