Impacted by the pandemic, the market for pension risk transfer through the purchase of group annuities plunged by 14 per cent in 2020 before making a strong comeback in 2021 with sales of $7.7-billion (all figures in this article are expressed in CAD). This amount is a record high.
With a total of $7.8-billion, the transactions carried out in 2022 set another record for this favored market. But with growth of just over one per cent when compared to 2021, has the growth of this market reached a plateau?
Mathieu Tessier, vice president of client relations and innovation, defined benefit solutions at Sun Life, says the market for group annuities has experienced previous plateaus since its expansion in 2013 but adds that transaction volumes have surged at each of the previous plateaus.
"There was the plateau from 2013 to 2016 with an average annual transaction volume of $2.5-billion, then the plateau from 2017 to 2020 with an average annual volume of $4.5-billion, and now the plateau of the past two years, with an average of almost $8-billion."
Faced with risks such as investment volatility, the longevity of retirees, and employers’ financial difficulties, the promoters of defined benefit plans are increasingly turning to the purchase of group annuities. Promoters have the option to transfer the risks while remaining the plan administrator and benefit payer. This is known as a "buy-in" transaction, where there is no transfer of liabilities. Alternatively, promoters can choose to transfer both the risks and the administration, as well as the payment of benefits, in a "buy-out" transaction.
Several life insurance companies offer group annuities to promoters of retirement plans seeking to manage these risks, including Assumption Life, BMO Insurance, Co-operators Life, Desjardins Financial Security, Canada Life, iA Financial Group, RBC Insurance, Brookfield Annuities, and Sun Life.
According to the latest report published in 2022 by Eckler, Sun Life held the largest market share in group annuities, with a 29 per cent share. RBC and Brookfield Annuities ranked second with 17 per cent each, followed by Desjardins with a 13 per cent share, BMO with nine per cent, and iA with eight per cent. Eckler is an actuarial firm specializing in pension risk transfer.
Attractive interest rates
The results of the $7.8-billion in sales achieved by the group annuities market in 2022 is exceptional from several perspectives, according to Tessier. One notable factor is the increase in long-term interest rates, which rose from three per cent in 2021 to between 4.5 per cent and five per cent in 2022.
Tessier points out that the premium to be paid for an annuity decreases when long-term interest rates rise (for example, the rate on 10-year or longer bonds).
The report covering the entire market reveals that the pricing of group annuities has improved by approximately six per cent since the beginning of 2019, compared to provincial bonds. According to the report, the yield of an annuity was 4.91 per cent in 2022, compared to 4.15 per cent for provincial bonds.
According to data revealed by Eckler, promoters may have paid even less in the first half of 2022. "The increase in long-term bond yields results in a reduction in the cost required to secure the benefits of pension plan participants through the purchase of annuities. For a defined benefit plan, this cost has likely decreased by 10 to 15 per cent since the beginning of the year," the actuarial firm wrote on its website in June 2022.
Roof repair
Tessier argues that the rise in interest rates has also strengthened the funding (solvency) of many pension plans. "This has prompted promoters to enter the market for group annuities," he says. According to him, the improved funding of the plans provides promoters with opportunities to reduce risk in their plans without significant financial impact.
Many promoters of defined benefit plans are considering alternative risk management solutions as well, and group annuities are on that list.
"When the weather is good, it's an opportunity to repair the roof," Tessier illustrates. This, however, is not necessarily the case when the plan is in deficit, as certain provisioning or accounting considerations then come into play.
According to his information, the average funded status of defined benefit plans in Canada exceeds 110 per cent of their obligations to employees and retirees. "We haven't seen this level of funding often in the past 25 years," he comments. As an example, a plan with a solvency level of 110 per cent hypothetically has $1.10 for every dollar of obligation it would have to participants if the plan were wound up.
Inflation boosts sales
The report also reveals that over 85 group annuity transactions took place in 2022, including 15 recurring buyers. Among the promoters who have participated in tenders since 2013, 45 have done so at least twice, and over 20 have done so at least three times.
Another notable trend observed by Sun Life is that 2022 was a record year for inflation-indexed annuities. They generated 17 transactions totaling $900-million, representing a 50 per cent increase when compared to 2021. The 10 inflation-indexed annuity transactions listed in the 2021 Sun Life report totaled $600-million. "Insurers have entered into inflation-indexed annuity contracts worth approximately $1.4-billion dollars in the past five years," Tessier adds.
On the other hand, the rise in prices has slowed in 2023. Inflation measured by the Consumer Price Index (CPI) by the Bank of Canada stood at 3.4 per cent in May 2023, compared to 4.4 per cent the previous month. The inflation measured by the overall CPI had reached a peak of 8.1 per cent in June 2022.
Assuris boost
By enhancing its levels of protection, Assuris has also given a boost to the group annuities market, according to Tessier. Assuris protects the benefits of life insurance, annuities, and segregated fund guarantees in the event of an insurer's insolvency. Since May 25, 2023, Assuris fully protects the monthly income of an annuity up to $5,000 or 90 per cent of the monthly income if it exceeds $5,000. Prior to May 25, 2023, the protection level was set at $2,000 or 85 per cent of the annuity income if it exceeded $2,000.
The monthly income limit had been set at $2,000 for several decades, notes Tessier. "This increase adequately modernizes the protection," he commented. The new protection not only reflects the variation in the cost of living and average annuities (for annuities under $5,000), but also increases the minimum protection for annuities over $5,000.
According to Tessier, this increase in Assuris' protection is expected to boost the confidence of plan promoters and participants who assume responsibility for retirement benefits. "We may see a simplification of market transactions, as fewer tiers will be required to obtain equivalent Assuris coverage. This could theoretically improve operational efficiency and market competitiveness," he explains.
