Pension risk transfer market volumes in 2023 match record

TELUS Health and its pension risk transfer team are warning that many defined benefit (DB) pension plans in Canada continue to bear a significant amount of equity risk.

“In the event of a downturn in equity markets, even those plans that are currently fully funded could face limitations on their annuity purchase opportunities,” they state. “This highlights the need for proactive risk management and the consideration of alternative strategies to mitigate potential volatility and protect funded positions.” 

The report, Pension risk transfer: 2023 year-end review, provides an economic and market outlook and the latest statistics on DB plans’ derisking activities. According to LIMRA statistics for the year, market volumes in 2023 matched the record set in 2022, reaching a total of approximately $7.8-billion.

Substantial surge expected 

“It is worth noting that it is anticipated that the number of quotes processed throughout the year will have increased from 2022 to 2023. This growth not only demonstrates the commitment of insurers to annuity purchases, but also highlights the continued interest of pension plan sponsors in transferring their plans’ risks,” they write. “Looking ahead to 2024, market observers anticipate a substantial surge in market volume compared to 2023. This projection is attributed, in part, to the postponement of certain large quotes from 2023 to 2024.” 

During 2023, 65 per cent of the annuity transactions were buy-out deals, while 35 per cent were buy-in annuities.

Favourable market environment 

Conditions leading to the popularity of annuity deals include long-term yields remaining relatively high through most of the year, coupled with a stock market rally which erased the previous year’s losses. “This favourable market environment presented a unique opportunity for pension plans in an advantageous financial position. They witnessed a substantial surge in asset returns and a simultaneous decline in liabilities, creating an ideal scenario for derisking.” 

Today, however, TELUS Health warns that long-term bond yields declined from October to December 2023 while credit spreads also decreased notably. “This sudden shift poses a potential risk to funded positions in the future,” they write.