December 15, 2020

Pension plan annuity purchase update – Q3 2020

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Market activity

Group annuity risk transfer sales ($ millions)

 

Source: LIMRA Secure Retirement Institute

 

The pension risk transfer market began its recovery from the negative COVID-19 impact in the third quarter of 2020. Total pension buyout sales totaled $4.6 billion in the quarter, which doubled the total from the previous quarter, but down 41% from the total of Q3 2019. However, 106 total buyout contracts were sold in Q3 2020, a decrease of 5% compared to Q3 2019, which shows volume of deals was comparable to last year but average size was much smaller. Year to date sales of $11.3 billion are down 32% compared to the $8.9 billion sold in the first three quarters of 2019, but 255 contracts have been sold so far in 2020, which is only a decrease of 15% from the same period in 2019.

What we're seeing

Many clients that delayed buyouts due to COVID-19 related shutdowns earlier in the year are now completing their buyouts in Q3 and Q4, as they have adapted to remote working conditions. The third quarter volume was more inline with past years, and Q4 is likely to be similar. Fourth quarter sales should easily eclipse each of the first three quarters of 2020. Pricing continues to remain very competitive. For retiree only cases, pricing continues to average about 98% of the accounting liability¹, while plan termination cases average about 100%².

What we're hearing

Pension buyout sales over the first quarter of 2021 might be relatively quiet compared to the past couple years. Many plan sponsors that were on the verge of terminating their plans early in 2020, and would have been seeking a pension buyout early in 2021 as part of that process, likely hit the brakes following the emergence of the COVID pandemic and the corresponding equity market volatility. However, now that the market has recovered and plan sponsors have gotten accustomed to working remotely, we expect sales to pick back up later in the year and expect 2021 to be another busy year of pension buyouts.

 

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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