With employee pension plans proving increasingly challenging for private-sector companies, RBC Insurance has recently launched a solution to help reduce the risk associated with defined benefit (DB) pension plans.“Ongoing low-interest rates and the market volatility of the past several years that has kept many investors on the sidelines are making it more difficult for companies to manage their DB pension plans. Add to that Canadians’ increased longevity, which means longer payout periods to pensioners,” said France Panneton, Mississauga, Ont.-based head of pension de-risking solutions at RBC Insurance.

These challenges are creating massive headaches for companies as they struggle to meet their pension obligations. To do so, they have to inject more cash into the plans, eroding the cash flow that’s available for capital investment and dividends to shareholders.

“Picture yourself in the role of a chief financial officer of a manufacturing company,” Panneton said. “If you’re putting more money into the company pension plan, it probably means you’re unable to put as much as you should into your core business. And you’ll have to explain your bottom line to your investors.”

There is currently about $600 billion in DB pension fund assets in the Canadian private sector, she noted. “But about 75% of Canadian publicly traded companies have closed their DB plans to new employees, offering them defined contribution plans instead,” plans that do not guarantee a specific retirement income. “And this doesn’t solve the underlying problems that DB plans face. It only ensures that the number of people covered by them is not increasing.”

Group annuity

RBC Insurance offers a group annuity as its de-risking solution – the payment of a one-time premium by the pension plan in exchange for the payment by the insurer of the monthly benefits for the covered retirees as long as they live. “This is a transfer of both longevity risk and investment risk to the insurance company,” Panneton said. “Taking on this kind of risk is RBC’s core business. RBC will determine how the pension assets are managed, and it will pay the retirees directly. The solution will allow a company to focus on its core business, and eliminate pension risk from its balance sheet.”

The amount of the one-time premium, she said, is based on the characteristics of the group of people that are covered, “including gender, age and selected options such as benefits reverting to spouses upon the death of plan members.”

Pension plan sponsors in Britain have been de-risking for several years, and Canadian corporations have started to follow suite. In March, Sun Life Financial and BCE Inc. made headlines with their announcement of an agreement under which BCE transferred $5 billion worth of pension liabilities to Sun Life. The Bell Canada pension plan will pay monthly premiums to the insurer; in exchange for monthly payments by Sun Life into the plan.

Panneton said RBC Insurance plans to expand the types of group annuity solutions to meet the needs of clients as the pension plan landscape evolves. “DC pension plans also have their challenges, and we’re looking at way in which we can serve them,” she said.