Operational risk modelling
The simplistic nature of the standard formula for operational risk under Solvency II can lead to excessive capital requirements, so we offer another approach.
As the Pension Risk Transfer market continues to grow, it has become increasingly important for plan sponsors to monitor the annuity buyout market when considering a plan termination or de-risking strategy. While we continue to monitor annuity purchase rates from all insurers, starting this month we have now also expanded our analysis to reflect the possible impact of competitive pricing to our estimated buyout cost. Figure 1 now illustrates retiree buyout costs based on both an average of all insurer rates in our study, and on just the most competitive rates, which represents the price savings that may be achieved when selecting between bids from multiple insurers.
During September 2020, average accounting discount rates increased by 2 bps, while annuity purchase rates increased by 9 bps (on average) and 11 bps (competitive). This caused the average estimated retiree buyout cost as a percentage of accounting liability (accumulated benefit obligation) to decrease from 102.9% to 102.3%, while the competitive pricing trend decreased from 101.0% to 100.2%.
When considering these results, please keep the following information in mind:
The Milliman Pension Buyout Index (MPBI) uses the FTSE Above Median AA Curve and annuity purchase composite interest rates from several insurance companies to estimate the cost, as a percentage of accounting liability, of transferring retiree pension obligations to an insurer. To review previous monthly findings, visit milliman.com/en/periodicals/Milliman-Pension-Buyout-Index.