There’s been significant talk among U.S. corporate pension plan sponsors around purchasing annuities for retirees in their plan (aka, a retiree lift-out, partial termination, or retiree buy-out). And for good reason, as there’s significant savings and de-risking opportunities available for strategically executed annuity purchases right now. However, plan sponsors need to be careful not to rush into a decision without considering all the potential costs.

What are retiree annuity purchases?

An annuity purchase is when a plan sponsor transfers the cost of paying benefits for specified participants to a life insurance company. The insurance company charges the plan an up-front premium, after which the insurer is responsible for covering the cost of all future payments to the covered participants. From the participant’s perspective, there are no significant changes, as they will continue to receive their benefit according to the terms they elected at retirement.

When a plan terminates, the plan sponsor purchases annuities for all remaining participants, but even prior to termination, plan sponsors can purchase annuities for a portion of their participants to achieve strategic cost-saving or de-risking goals. In such cases, the most common strategy is to purchase annuities for a subset of the retiree population. Between plan termination and retiree annuity purchases, annuity purchases have become quite common, with nearly 800 transactions occurring in the United States during 2024, totaling over $51 billion¹.

Annuity purchase considerations

De-risking

De-risking has been a hot topic among pension plan sponsors over the past couple of decades. It refers to making changes to the plan that reduce the plan sponsor’s risk exposure. Since in a retiree annuity purchase, the financial responsibility of covering the participant costs is transferred to the life insurance company, the remaining financial obligations for the plan sponsor are reduced. Smaller liabilities mean smaller risks for the plan sponsor. For example, if a $100 million plan experiences a 10% investment loss, the plan sponsor may need to make up the $10 million loss with higher contributions in future years. However, if the plan had first purchased $30 million of annuities for retirees, and thus shrunk the plan to only $70 million, a 10% investment loss is only going to cost the sponsor $7 million in higher contributions.

PBGC premium savings

One of the most discussed benefits of a retiree annuity purchase is the Pension Benefit Guaranty Corporation (PBGC) premium savings. Plans must pay annual premiums to the PBGC (a government agency charged with guaranteeing pension benefits to corporate employees and retirees in the case of employer bankruptcy). These premiums take two forms:

• Flat-rate premium: In 2025, all plans are charged a premium equal to $106 per participant. This premium amount has seen drastic increases over the past 12 years due to legislative changes and inflation, increasing from only $42 per participant in 2013, and it is indexed to increase with national wage inflation in future years.
• Variable-rate premium: In 2025, if a plan is deemed underfunded on a PBGC variable-rate premium basis, the plan is charged an additional premium equal to 5.2% of the unfunded liability, up to a maximum of $717 per participant (on top of the flat-rate premium). Like the flat-rate premium, this also has seen drastic increases in recent years, increasing from only 0.9% with a $400 per participant cap in 2013. The per participant cap is also indexed to increase with national wage inflation in future years.

Purchasing annuities for retirees can decrease the number of participants in the plan, thus decreasing the plan’s annual PBGC premiums by $106 per retiree or $823 per retiree for a plan at the variable-rate premium cap.

Lower ongoing administrative expenses

Another advantage of purchasing annuities for retirees is lower ongoing administrative expenses (such as fees paid to auditors, actuaries, and the plan trustee). While some administrative expenses are relatively fixed (e.g., the cost of preparing and filing a Form 5500 each year), others are based on the size of the plan. For example, fewer retirees receiving monthly checks means lower fees paid to the trustee issuing these checks each month. The amount of these savings can vary greatly from plan to plan, so a plan sponsor should look at their own situation to quantify these savings.

Insurance loads

While the premiums life insurance companies charge for an annuity purchase primarily cover the cost of future benefits payable to the covered participants, they also include additional loads to cover insurer administrative costs, insurer profits, uncertainty/risk for the insurer (e.g., how long retirees will live), and other items. These loads can come out to a few percentage points in extra premiums and decrease the cost effectiveness of a retiree annuity purchase.

For example, the Milliman Pension Buyout Index (MPBI) for March 2025 showed an estimated load of 1.7% of the accounting liability based on the discount rates that insurers report that they use to calculate the premiums. However, the MPBI is based on the insurers’ self-reported discount rates, so actual experience often varies. There is also uncertainty around this load as it depends on how competitive the insurer bidding process is, how much capacity and demand the insurers have for annuity purchases at that point in time, the size of the annuity purchase, and many other factors.

Lost investment earnings

One of the most overlooked costs of purchasing annuities is the lost earnings potential of the plan assets. Most plans are invested such that their assets are expected to outperform the plan’s liabilities, increasing the funded status of the plan over time and decreasing future costs for the plan sponsor. However, when an annuity purchase occurs, a portion of the plan assets are transferred to the life insurance company. These assets are no longer available to earn investment earnings in the plan. For example, let’s say a plan has a liability interest rate of 5.0% and plan assets are expected to earn 6.0% annually. In this case a $10 million annuity purchase will result in $100,000 of lost investment earnings each year ($10m x (6.0% – 5.0%) = $100,000). While these investment earnings may be volatile over time and are not guaranteed (see the de-risking section above), on average, lost earnings are an extra cost to plan sponsors that needs to be accounted for, especially in a plan that has a significant amount of equity investments or other growth assets.

One-time fees and plan sponsor time

Running an annuity purchase process comes with some one-time fees to plan consultants. These fees cover gathering the participant data to provide to insurers, running the competitive bidding process, educating the plan sponsor on the fiduciary considerations, executing the group annuity contract, etc. These fees will vary significantly depending on the administrator and the size of the annuity purchase, so a plan sponsor should look at their own situation to quantify this cost.

In addition, the plan sponsor needs to be prepared to spend time working through the various steps and meeting their fiduciary requirements. While a good consulting firm can help guide the plan sponsor through the process, it will still take some of the plan sponsor’s time.

Funded ratio

Retiree annuity purchases (especially those covering a large portion of the plan) can have a material impact on the plan’s funded ratio. For example, let’s say there is a plan with liabilities of $200m and assets of $180m for a funded ratio of 90%. The plan sponsor then purchases retiree annuities, reducing liabilities by $100m at a cost of $102m in insurer premiums. This lowers the liabilities to $100m and the assets to $78m, which now puts the funded ratio at only 78%. Plan sponsors should work with their actuary to ensure that a potential decrease in funded ratio doesn’t trigger unwanted restrictions. Note that IRC 436 does give temporary relief for funded ratio drops due to annuity purchases, so plan sponsors generally have two years to get the funded ratio back above any critical thresholds before restrictions would apply.

Settlement accounting

A retiree annuity purchase is considered a settlement event under FASB ASC 715 if it exceeds the plan’s interest cost plus service cost for the year. Settlement events require a remeasurement and immediate recognition of a portion of the plan’s unrecognized gains or losses. In the case that there are significant unrecognized losses on the balance sheet, this settlement accounting could result in large charge to the plan sponsor’s income statement for the year. Plan sponsors should consider how this affects their business when looking at a retiree annuity purchase.

Cost analysis

Many of the above considerations are direct costs or savings to the plan sponsor, which an actuary can quantify and compare to calculate the potential net savings from a retiree annuity purchase. These calculations often show that net savings are highest when the plan sponsor focuses on purchasing annuities for retirees with small benefits. This is because the primary costs (insurance loads and lost investment earnings) scale with the size of the benefits, but the primary savings (reduced PBGC premiums) do not scale with the size of the benefits given they are a flat dollar amount per participant. Thus, purchasing annuities for participants with small benefits allows the plan to achieve the most PBGC premium savings while minimizing the costs. As illustrated below, actuarial analysis can be used to determine this cutoff point, below which retiree benefits are small enough that purchasing an annuity is expected to produce net savings.

Example analysis

Below is an example of this analysis based on one set of assumptions:

• Age 70 female retiree.²
• Plan is paying variable-rate premiums at the cap.^3,4
• Ongoing administrative expenses will be reduced by $40 per year per retiree included in the annuity purchase.⁴
• Insurance loads are 2% of accounting liabilities.⁵
• Plan assets are expected to earn 5.7% per year compared to a liability interest rate of 5.5%.⁵
• One-time fees to administer the annuity purchase are $100 per retiree.

In this example, the analysis shows that the plan sponsor can achieve long-term net savings of $3,933 for each retiree with a $100 monthly benefit that they purchase annuities for. This net savings decreases as benefit size increases. For retirees with a $900 monthly benefit, the net savings of purchasing an annuity is only $183. Then, at benefits of $1,000 per month and above, there is a net cost to the plan to purchase annuities. The exact cutoff in this example is $939 per month, so maximum savings is achieved by purchasing annuities for all participants with benefits below this cutoff.

Variability of analysis

While the above table provides an example of calculating a $939 per month threshold, this will vary greatly by plan based on many factors, including the size of the plan, funded status, participant demographics, benefit design, asset allocation, etc. The following highlights two of the key factors:

• Investment allocation: For plans with more aggressive investment allocations, the investment earnings are expected to be higher. This corresponds to more lost investment earnings if some of the plan assets are used to purchase annuities for plan participants. The opposite is true for a plan with a more conservative asset allocation. To highlight this impact, the below analysis looks at a range of asset allocations.
• PBGC variable-rate premium status: Underfunded plans that have reached the PBGC variable-rate premium cap have a greater opportunity to generate significant PBGC savings by reducing the headcount of the plan. To highlight this impact, the below analysis looks at two scenarios:
  1. The plan has no variable-rate premium (no VRP).
  2. The plan has a VRP at the cap (VRP at cap).

Other than these variations, the below analysis uses the same assumptions as that illustrated above.

As seen, the other scenarios produce a much lower threshold than the original $939 per month scenario (5.7% expected investment earnings and VRP at cap). For example, if the plan is invested more aggressively with an expected investment return of 6.7% and is not paying PBGC variable-rate premiums, the maximum savings is limited to only purchasing annuities for participants with benefits below $116 per month. This demonstrates how critical it is to complete a plan-specific analysis, rather than relying on general rules of thumb. Using a threshold too high will result in the plan losing money rather than seeing net savings, and using a threshold too low leaves potential savings on the table.

Conclusion

Retiree annuity purchases are a popular tool used by plan sponsors to de-risk and save money. However, the plan sponsor should be careful to weigh all the pros and cons with their consultants before making a decision and be wary of sources that provide easy answers regarding which retirees to include in a potential annuity purchase.

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¹ LIMRA. (March 17 2025). LIMRA: U.S. Single-Premium Pension Risk Transfer Sales Leap 14% to $51.8 billion in 2024 [Press release]. Retrieved April 24, 2025 from https://www.limra.com/en/newsroom/news-releases/2025/limra-u.s.-single-premium-pension-risk-transfer-sales-leap-14-to-$51.8-billion-in-2024/.

² Assumed mortality rates from Pri-2012 retired female mortality tables projected from age 70 in 2025 with improvement scale MP-2021 for females.

³ Plan is assumed to make up the funding shortfall after four years, so variable rate premiums are assumed to remain at the cap for four years, then reduce to zero.

⁴ PBGC premium rates and ongoing administrative expenses are assumed to increase by 2.3% per year with inflation.

⁵ Accounting liabilities are measured using the December 31, 2024, FTSE Above Median Double-A Curve, which gives an effective interest rate of 5.5% for this example participant.

⁶ Ongoing savings and costs are condensed into a single present value using the expected return on assets assumption.

⁷ Fixed income assets are assumed to be allocated 25% to core U.S. fixed income investments and 75% to long U.S. government/credit bonds. This is an example allocation and should not be taken as investment advice.

⁸ Growth assets are assumed to be allocated 55% to broad U.S. equities, 30% to non-U.S. equities, 5% to real estate, 5% to private equity, and 5% to hedge funds. This is an example allocation and should not be taken as investment advice.

⁹ Expected investment returns are based on the 20-year nominal annualized return from Milliman’s December 31, 2024, capital market assumptions.