2021 was a very good year for the defined benefit (DB) pension de-risking market in Canada. Growth in the last five years has been significant, as well.

At a recent webinar, Focus 2022: Helping you manage DB pension risk, Sun Life experts in pension plan annuities discussed the market, what drove growth in 2021, and their advice for navigating pension de-risking deals in 2022 and beyond.

Equity markets in 2021 contributed to significant improvement in pension plans’ funded statuses – a key contributor to the trends witnessed in 2021, says Dhvani Desai, director of client relationships, DB solutions, with Sun Life.

Brent Simmons, head of defined benefit solutions at Sun Life adds that in the last two years, “the yield on annuities has actually become more favorable compared to the yield on many fixed income products, many bonds. Two impacts have been seen in the market. The first is annuities look more interesting, relative to a plain vanilla bond portfolio. And the second is investment managers are getting more creative.”

Pricing and funding triggers 

SLC Management managing director, client solutions, Ashwin Gopwani says pricing and funding triggers caused many plan sponsors to de-risk their portfolios during the year, but the company also saw a number of ad hoc conversations occurring between plan sponsors and their service providers, discussing strategy changes that might lock in some of the gains made in 2021. All told, the company helped 14 plan sponsors to de-risk their plans in 2021. 

In addition to strong equity markets, interest rates were also up during the year. Gopwani says although this likely meant that fixed income portfolios have decreased in value, he says by and large, rising interest rates had a greater impact on most pension plan liabilities.

“This was generally quite positive on average for plan sponsors,” he says

Desai, meanwhile, says having good governance, stakeholder engagement, data readiness and clear price triggers, all allowed companies to transact quickly and take advantage of competitive pricing last year. “We take that as a good indicator of a well-functioning market when previous buyers come back to the market,” she says. (In 2021 more than 70 plan sponsors purchased annuities in the Canadian marketplace; 15 of these deals involved plan sponsors who had previous experience in the market.) 

The market is not only well functioning, in the past five years, between 2018 and 2021, Sun Life says the Canadian group annuity market grew $25.5 billion. Looking at the five years before that, between 2012 and 2016, the market grew just $11.1-billion.

A record number of deals 

In 2021 they add there were also 22 deals over $100-million, a record number. “We’re seeing that plan sponsors are getting more comfortable with large transactions,” Desai says.

“Group annuity buy-ins and buy-outs are equally popular and competitive,” the company’s researchers write in its recently released report, Overview of the 2021 Canadian group annuity market. The difference in popularity between the two different deals shifts depending on the year’s largest transactions.

Group annuities, explained 

“They (buy-in and buy-out annuity transactions) are traditionally priced the same,” says Desai. “Buy-ins do not trigger an accounting funding impact. They are viewed in the same way as an investment in the plan, as part of the investment strategy. Buy-outs, on the other hand, may trigger an accounting or a funding impact, but they allow the plan sponsor to transfer all of the administration the insured group to an insurer.” 

As for the future, Gopwani says the company expects to have more conversations and see increased interest in protecting DB pension plans from inflation risk.

“It’s difficult to know what the next milestone will be for the Canadian group annuity market, but it does feel like there’s capacity in the market to continue to grow,” says Desai. 

Advice for plan sponsors 

Insurance company’s capacity for group annuity deals, however, is not unlimited. For pension plan sponsors who are interested, the experts across the board say it’s better to come to the market earlier than later in the year.

“I’d also really encourage plan sponsors to come to market earlier in the year,” Eric Soehner, managing director of structuring with Sun Life’s DB solutions told the group of those gathered for the virtual presentation. “Last year, Sun Life, in early November, we actually ran out of nominal asset capacity and stopped quoting on transactions for non-indexed liabilities in November and December. Waiting until late in Q4 is a bit of a gamble.” 

Similarly, they say companies do not want to be coming to the market on the same day as another large transaction.

Although they add that no transaction is like another, there are some lessons that can be learned from plan sponsors and consultants who’ve been part of significant deals in the past.

  • From the beginning, identify each stakeholder’s role. Have clear communication with them about what will be expected from them.
  • Consider personal fit with the companies you’re working with. “You will go through a lot of ups and downs throughout the process,” says Jérôme Couture, principal, pension investment and actuarial with Rio Tinto.
  • Don’t overlook data preparation or portfolio readiness. “When you’re coming to market very well prepared on at least these two items, you’re really showing to the insurers that your serious,” says Véronique Lauzière, associate partner, investment and risk and innovation with consulting firm, LifeWorks.
  • In preparing data, consider doing survival audits to ensure the plan is not insuring any deceased members. When data is not perfect, there is a mechanism called a premium adjustment which occurs months after the transaction is completed. “This is an opportunity for us to exchange cash flows for data that’s incorrect,” says Soehner. “There’s an opportunity to true up that data.” That said, he adds that it is worthwhile to invest the time up front to avoid unexpected premium adjustments after the fact.
  • Communication to plan members should not be an afterthought, adds Lauzière. Affected members, non-affected members, regulators, investors and the general public should all be considered as they are all potentially important.