Corporate Pension Plans' Financial Health and Annuity Buyouts
The financial health of the largest U.S. corporate pension plans has reached its highest point in nearly three years, making annuity buyouts more feasible and cost-effective below book value.
As of August, the Milliman 100 Pension Funding Index (PFI) indicated a funded ratio of 112.2%, a notable increase from 104.9% the previous year. This improvement is largely due to favorable asset returns and a discount rate of 6%, a level not consistently observed in several years. According to Milliman, these plans hold assets totaling $1.299 trillion, surpassing projected benefit obligations of $1.158 trillion, resulting in a substantial $141 billion surplus.
Why Discount Rates Matter
Discount rates significantly affect the pricing of annuity buyouts. Higher rates reduce the present value of future pension payments, leading insurers to charge less for assuming liabilities. The current 6% rate is the highest in three years, with predictions of stability through 2026 unless major market shifts occur. Lower costs open avenues for companies to execute buyouts at approximately 99.6% of accounting liabilities—an option now available through competitive offers, according to Milliman's June pension buyout index.
Market Trends and Changing Dynamics
The U.S. pension risk transfer market witnessed $3.8 billion in buyout and buy-in sales during the first quarter of 2026, a 47% decline from the previous year. LIMRA attributed this to a strong fourth quarter in 2025 and characterized early 2026 as a temporary adjustment rather than dwindling demand. Interestingly, the market in 2025 was robust, with buy-in sales surging 372% to $17.5 billion. Small to medium-sized sponsors, previously less common in these transactions, are increasingly involved. As competition among carriers grows, pricing has become more competitive, encouraging even mid-sized employers to consider these options.
Strategic Approaches for Plan Sponsors
While some advisors advocate for postponing buyouts to capitalize on potential asset growth, executing buyouts promptly allows plans to secure current pricing, remove liabilities, and cut administrative costs and PBGC premiums. According to ERISA mandates, plan sponsors must choose the safest available annuity provider for transfers, a requirement that necessitates thorough due diligence.
An emerging strategy gaining traction is the buy-in approach, which involves transferring asset and longevity risk to insurers while retaining liabilities on balance sheets, with the option to transition to a full buyout later. LIMRA reported a 443% increase in buy-in premiums for the first quarter of 2026 compared to the prior year.
Looking Ahead
| Pension Funding Projections | End of 2026 | End of 2027 |
|---|---|---|
| Optimistic Scenario | $145 billion surplus | $156 billion surplus |
| Cautious Scenario | 99% funded ratio | Potential decrease |
Milliman projects a surplus reaching $145 billion by late 2026 and $156 billion by late 2027, assuming stable rates and 6.61% average annual asset returns. In contrast, a more cautious scenario, with lowering rates to 5.20% and a deceleration of returns to 2.61%, could see the funded ratio dip to 99% by the end of 2027. These uncertainties highlight the risks of delaying buyouts, particularly if market conditions deteriorate unexpectedly.