Emile Alarie

Insurers sold $7.8 billion in group annuities to sponsors of defined benefit retirement plans in 2023, according to a recent report published by the Insurance Portal. This marks the third consecutive year the market has reached the $7 billion mark, with sales totaling $7.8 billion in 2022 and $7.7 billion in 2021. By comparison, the industry sold $4.4 billion in annuities to plans in 2020. 

Purchasing group annuities allows plan sponsors to offload financial risks associated with the stock market and interest rates, as well as inflation when plan benefits are indexed. A group annuity also relieves the longevity risk of retirees. Once the premium is paid, the annuity purchased by the plan sponsor ensures the payment of benefits to retirees until the death of the last survivor. 

Purchasing annuities allows for a complete transfer of risks – Émile Alarie 

"Purchasing annuities allows for a complete transfer of risks," explained Émile Alarie, Senior Associate, Pension Risk Transfer Specialist at Mercer Canada, in an interview with Insurance Portal. Alarie illustrated that a sponsor could convert an equity portfolio into a bond portfolio to limit exposure to stock markets. With a group annuity, they can completely eliminate this risk, in addition to that of interest rates, he added. 

Eliminating longevity risk is also among the goals of sponsors, albeit to a lesser extent, according to Alarie. He noted that large, mature plans often develop expertise in managing these risks. 

Eight insurers dominate the retirement risk transfer market: Assumption Life, BMO Insurance, Co-operators, Desjardins Financial Security, iA Financial Group, RBC Insurance, Brookfield Annuities, and Sun Life. Previously there were nine. Canada Life exited the market in August 2023 after several years of activity. 

Market took off in 2013 

Marco Dickner

From 2008 to 2012, the average annual transaction volume was limited to $1.1 billion, according to the report Group Annuity Market Pulse – First Quarter 2024 by consulting firm WTW. The risk transfer market took off in 2013, when the transaction volume exceeded $2 billion for the first time. 

WTW acted as a consultant in the first transaction to exceed one billion dollars. Announced in 2021, this $1.8 billion transaction between the General Motors of Canada plan and insurers Sun Life, iA Financial Group, and Brookfield Annuities protected the benefits of 6,000 retirees. As a consultant, WTW has dominated the market in terms of transaction volume since 2021. Its closest competitors are Aon, Mercer, and TELUS Health

Marco Dickner, Managing Director and Retirement Risk Management Leader, Canada, WTW founded the retirement risk transfer team at WTW 12 years ago. Dickner told Insurance Portal that his team has since been at the center of transactions totaling over $16 billion today. 

Growth Potential 

Some significant transactions did not occur in 2023 and were deferred, potentially to 2024 – Mathieu Tessier 

In its Industry Watch - Overview of the 2023 Canadian group annuity market report, Sun Life indicated that deals under discussion could lead to transactions totaling $17 billion. "It's a probability; not all these transactions will necessarily materialize in 2024," clarified Mathieu Tessier, Vice President of Client Relationships and Innovation, Defined Benefit Solutions, at Sun Life. 

Those that do materialize in 2024 could, however, shift the needle, says Tessier. "A few significant transactions did not occur in 2023 and were deferred, potentially to 2024. The market should see some growth," he observed. 

Mathieu Tessier

At Mercer, Émile Alarie anticipates that the total volume of annuities in 2024 will exceed that of 2023. According to him, last year's results stand out due to a lower number of large transactions compared to previous years. "Several major sponsors had already purchased before 2023. The volume brought by these sponsors has decreased. There was therefore a strong volume of small and medium transactions," he said. 

"The plateau we observed is partly attributable to the insurers' capacity to absorb the strong demand of 2023," added Émile Alarie. The eight insurers in the market have different capacities. Alarie believes, however, that insurers have increased their capacity over the years. He thinks that the market will be able to absorb the high demand expected in 2024. 

The plans are in excellent financial condition – Marco Dickner 

According to the WTW report, transaction volume had already reached $1.1 billion at the end of the first quarter of 2024, setting a record for a first quarter. Marco Dickner sees two main reasons behind the rise of annuities as a tool for transferring retirement risks. 

"Closed plans (which no longer accept new participants) are increasingly mature: they have more retirees. Sponsors start by reducing the risk and properly funding their plan. Once that's done, they transfer the risk, hence the demand for annuities." 

"The plans are in excellent financial condition. More than 80% of the plans are fully funded, on a purchase basis. We see that the plans have the capacity to buy annuities because they have the money to afford it." 

The window is open 

The window is open for those who have not yet made a transaction to look at their options – F. Hubert Tremblay 

With solvency pushing beyond the 100% mark throughout 2023, high interest rates have enabled sponsors to buy annuities. In the third quarter, plans still showed financial health above 100%. 

"When a plan is in good health, one can think of a risk reduction strategy for the future. This creates enthusiasm among plan sponsors," says Mathieu Tessier. In its report, Sun Life highlights that 140 sponsors bought group annuities in 2023. Among them, 20 repeat buyers concluded new transactions. 

Present at the interview with Insurance Portal along with his colleague, Émile Alarie, F. Hubert Tremblay said, "The window is open for those who have not yet made a transaction to look at their options." A partner at Mercer Canada, Tremblay believes it's a very good time for plan sponsors to decide on the risk they want to take. 

F. Hubert Tremblay

The decision could be to purchase annuities or other solutions, said F. Hubert Tremblay. "Defined benefit plans are in a very good financial position. They have developed surpluses, excess assets. They are able to make decisions that will remove risk. These solutions will be funded by the surpluses," he explains. 

The surpluses will decrease but will leave the plan "in a positive zone," says Tremblay. He adds that the plan will have reduced its risk along the way, whether through the purchase of annuities or a change in investment policy. "The window is now open, but will it be tomorrow? The economic context may close it," adds F. Hubert Tremblay. 

The Bank of Canada (BoC) announced on April 10, 2024, that it was maintaining its key interest rate at 5.00%, due to persistent inflation. However, BoC governor Tiff Macklem did not close the door to rate cuts for the announcement scheduled June 2024. 

While waiting for the cuts, the high interest rates have helped lower the price of group annuities, observes Mario Dickner, making them even more attractive to plan sponsors. As the yield on the annuity corresponds to that of long-term fixed income investments, any rise in interest rates gives more value for the client's money. "The costs of purchasing annuities have dropped by 20% to 30% over the past three years," he notes. 

Inflation drives sales 

Émile Alarie mentions another financial risk that the annuity can eliminate. "The sponsor could take annuities to transfer the inflation risk to the insurer," he said. At 2.9% in March 2024, inflation is not what it was in June 2022, when it reached 8.1%, according to data based on the overall Consumer Price Index (CPI) reported by the BoC. 

Inflation continues, however, to concern plans. "Inflation is a concern that leads to a higher volume of group annuity transactions, both for inflation-indexed annuities and non-indexed annuities," observes Mathieu Tessier. 

Sun Life's report reveals that insurers have underwritten more than $2.4 billion in inflation-indexed annuities since 2021, including more than $935 million in 2023. A record. "We have worked very hard on these tools. The results from 2021 to 2023 represent a volume higher than all previous years, and we are not finished," says Mathieu Tessier. From 2013 to 2020, transactions of inflation-indexed annuities totaled just over $2.2 billion, according to Sun Life's report. 

The WTW report notes that annuities indexed to the CPI accounted for about $1 billion of the transaction volume recorded in 2023. 

However, there is a shadow looming on the horizon. Tessier points out that the Canadian government announced at the end of 2022 that it would no longer issue real yield bonds, an important tool for indexed annuities. This will force the industry to find other solutions, he believes. "There is still volume in real yield bonds on secondary markets, but it will diminish as these bonds mature," he warns. 

Tessier says insurers could turn to other global tools, including U.S.-based inflation-linked bonds.