In the world of pension funds, the hot topic right now is risk transfer for defined benefit (DB) plans. This trend has intensified since the pandemic and shows no signs of slowing down anytime soon.
Looking at the evolution of the Canadian retirement risk transfer market, one notices that it has literally exploded over the past decade. Before 2015, this market never exceeded $1 billion in annual volume. Just before the COVID-19 pandemic, this total had jumped to $5.3 billion. Two years later, in 2021, it had jumped to $7.7 billion, remaining at that level until 2024, when it rocketed to a record $11 billion. Last year, the total fell back to $6.8 billion. In the first quarter of this year, it stood at $345 million, according to LIMRA and Sun Life.
“There is certainly a movement in favour of buy-out plans [with transfer of liabilities], managed by insurers,” observes Claude St-Laurent, Associate Partner in the Retirement and Asset Management team at Normandin Beaudry. “For pension funds, guaranteed annuities represent an excellent form of risk management.”
With a buy-in plan (no transfer of liabilities), retirees remain full participants in the pension fund.
In a buyout plan, the link between the participant and the pension fund is severed. The insurer pays the pension promised by the fund and assumes the solvency risk.
Is it slowing down?
Is the decline observed in the first quarter, compared to previous years' results, temporary? It's worth noting that you must go back to 2022 to find a lower volume, at $293 million. "It will be difficult to beat the records of recent years, but demand remains very high, even in a context of surplus," comments St-Laurent.
The market is now stable, and this could even extend over a decade, estimates Mathieu Tessier, Vice-President, Client Relations and Innovation, Defined Benefits Solutions, at Sun Life.
"Obviously, there will be an eventual decline, due to the inevitable drop in the number of retired participants," he says. "And several plans will eventually close."
The current context
To understand the motivations of pension fund managers, we must go back in time. More precisely, to the bursting of the dot-com bubble at the turn of the century. The late 1990s were marked by a great deal of activity, to the point that many called it a speculative bubble. Before it burst, many defined benefit (DB) plans were in excellent financial health. Most had enormous surpluses, to the point of granting contribution holidays to employers.
Six years later, the asset-backed commercial paper (ABCP) crisis erupted in Canada, following the subprime mortgage crisis in the United States. This was another major blow to DB plans.
In the private sector, employers, having learned their lesson, abandoned this market in favor of defined contribution (DC) plans. These plans do not include a legal requirement to recapitalize the fund to cover actuarial deficits, meaning they do not require the fund to ensure it has the resources to fulfill its promises to current and future retirees. A defined benefit (DB) plan guarantees the payment of a pension whose amount is known in advance. With defined contribution (DC) plans, the pension amount varies according to the pension fund's performance.
“In the 1990s, pension plans lacked adequate interest rate hedging and had invested heavily in the financial markets,” explains Mathieu Tessier. “With each stock market crash, interest rates fell and remained at rock bottom for many years. This resulted in significant deficits and considerable volatility for the plans. While their managers sought stability above all else, they experienced a rollercoaster of emotions.”
It is worth remembering that pension plans are primarily a human resources management tool for employers. When they focus their energy on defined contribution (DC) plans, defined benefit plans become a burden.
“In the 1990s, pension plans were thought to cost nothing because most showed surpluses; there were no surprises or deficits. Subsequently, employers were forced to cover a whole series of unforeseen shortfalls. This led to what I call a post-traumatic stress disorder among pension fund managers,” comments Isabelle Clément, a partner in the retirement practice at Normand.
In practical terms, the option of entrusting the management of investment and longevity risks to an insurer is immediately appealing to many pension fund managers.
“A purchase of an annuity allows the plan’s value to be locked in at the time of transfer for the participants concerned,” she continues. “For many plan managers, this is good governance.”
Going well
Today, Canadian pension funds are swimming in surpluses. They have never been so solvent. This is due both to more prudent management aimed at avoiding recapitalizations and to favorable financial markets against a backdrop of geopolitical tensions, as the Insurance Portal reported last May.
The good times continue in the offices of pension fund managers. Thus, in the second quarter of 2026, the average funding ratio of defined benefit plans stood at 132% (as of June 30), up 3%, according to the Normandin Beaudry index. The average solvency ratio was 121%, up 5% after a two-point drop in the first quarter.
Geopolitics also partly explains these positive results, with rising returns on the stock markets, compared to a decline in March triggered by the outbreak of war in the Middle East. The rise in the value of companies linked to artificial intelligence also played a role, as they now represent 40% of the S&P 500 index. Since interest rates remained relatively stable during the last quarter, their impact on bonds was minimal.
Popular nonetheless
Isn't the popularity of insurer-managed annuities contradictory in this highly favorable context? “There is an advantage even in a surplus situation,” comments Claude St-Laurent. “The concept of risk reduction is attractive because of the ‘risk of regret.’ Because using surpluses is irreversible.” In fact, in a surplus situation, a pension fund can grant a contribution holiday, within the limits of the law. But if another crisis occurs in the financial markets, the specter of a deficit can reappear.
For example, if a fund has $100 million in assets and experiences a 10% drop in value on the markets, the asset is now worth only $90 million. If the fund instead transfers $50 million in annuities to an insurer, the exposed asset is then only $50 million. In the event of a 10% loss, this will therefore total $5 million instead of $10 million, even if the total value of the promised annuities remains $100 million. With pension transfers, the freezing of a portion of the plan is permanent. Of course, variables such as investment policy must also be considered.
Still growing
It's important to remember that the billions of dollars in question here relate to a shrinking market: defined benefit (DB) plans… except in the public sector. The Canadian market is worth around $2 trillion, 50% of which is for public sector plans. The remainder is shared between large private employers and private and parapublic institutions.
“We're talking about a growing activity in a sector that's losing momentum,” comments Mathieu Tessier. “However, despite the small number of DB plans in the private sector, their obligations have increased, [particularly due to] the large number of retired participants.” Life expectancy plays a role: “I'm an actuary by training,” explains Tessier. Forty years ago, we collectively made a 20% to 25% error in our projections on this issue. Today, life expectancy is increasing by 2% to 3% each year. This translates into plans that must pay benefits for a longer period.
On the other hand, the current cohort of active workers contributing to defined benefit (DB) plans remains significant. Even though, for the past ten years, employers have been steering their recruits toward defined contribution (DC) plans, those covered by DB plans continue to contribute. The value of these assets is steadily increasing.
"In 2015, the typical annuity transfer transaction was relatively modest, around $75 million. Today, that amount has easily increased tenfold," says Mathieu Tessier. Thus, transferring risk to the insurer retains its appeal, even in a surplus situation, simply for reasons of return. “Many plans are now closed because all their participants are retired. Managers are naturally considering an exit strategy. To avoid future volatility and ensure the promised annuity payments, a buyback of the annuity by an insurer remains attractive. In a plan where participants have an average age of 22, volatility can be managed. But with a closed plan, the trustees' responsibility is to ensure that the promises are honored, regardless of future crises.”
Managers can even be sued. Caution is advised, regardless of the plan's maturity,” explains Isabelle Clément.
In some economic sectors, using an insurer is a natural choice. For example, retirees from a mining company will opt for security, even if it means losing the connection with their employer, which operates in a volatile sector. The opposite is true for a municipality, which will never go bankrupt.
Of course, this type of decision is made by the pension fund manager, which consults with its members. In Quebec, this is usually a committee made up of representatives from the employer and employees or the union. Elsewhere in the country, the employer is often the fund's administrator, which sometimes creates a conflict of interest.
In recent years, the insurance industry has become more creative in attracting pension transfers. For example, insurers now cover the risk of inflation, as many funds now pay indexed benefits.
