General Motors (GM) Canada transferred $1.8 billion in pension liabilities to Sun Life, iA Financial Group and Brookfield Annuity in a transaction announced April 7, which was advised by Willis Towers Watson. The deal took a year to come to fruition, Insurance Portal learned.
By purchasing group annuities from the three insurers, the automaker can offload the longevity risk of more than 6,000 retirees from its salaried employees' defined benefit pension plan.
Specifically, GM Canada has bought annuities from three insurers in the following proportions: $1.1 billion from Sun Life, $600 million from iA Financial Group and $100 million from Brookfield Annuity, an insurer focused on annuity solutions.
This deal is an annuity buy-out. The pension plan sponsor pays a single premium to the insurer, which in turn becomes responsible for making annuity payments directly to members.
Twelve months in the making
This transaction is unique in that GM Canada has transferred most of the pension plan's investments in-kind to the insurers, rather than having to sell them in the capital markets. Two of the key players took The Insurance Portal behind the scenes of the deal.
"We spent 12 months preparing for this transaction in close cooperation with Willis Towers Watson, and the plan sponsor," explains Mathieu Tessier, Senior Managing Director, Client Relationships & Innovation, Defined Benefit Solutions at Sun Life. Having more time makes it easier for the insurer to find the most appropriate assets to cover the risk, he says.
Sun Life has committed to increasing its volume per plan risk transfer transaction, he points out. In January 2020, Sun Life landed a $560 million transfer that Iron Ore had initially planned to award to three insurers. “We put ourselves in the shoes of a plan sponsor that has billions of dollars in liabilities to its retirees. Being able to insure it all in one transaction versus having to go back to the market multiple times is an advantage.”
In-kind transfers:A winning condition
Another clincher was that the transaction was mainly in-kind, Tessier adds. The assets transferred represented $1.4 billion of the $1.8 billion total, he explains. "In a group annuity transaction, the plan sponsor typically writes us a cheque. It transfers money in cash. The alternative is to transfer assets to us, to send us a bond portfolio, for example.”
Eric Jobin, Executive Vice President, Group Benefits and Retirement Solutions at iA Financial Group, echoes Tessier’s views. "In annuity transactions designed to transfer risk, there is always a cash portion and an asset transfer portion. Generally, an asset transfer is much easier, both for the pension fund and the insurer. We can then manage liquidity risk," Jobin told Insurance Portal.
Mathieu Tessier calls the $1.4 billion figure staggering. "It's probably several times larger than the second largest in-kind transfer ever. Receiving the assets directly from the pension plan helps us seek out the right assets.”
The plan sponsor was involved in this search, Tessier says. He stops short of identifying the type of assets, but says they are specific to plan risk management.
"It’s generally in the fixed return investment universe. That's where we start looking for most of the assets we need," he says.
Tessier adds that Sun Life is interested in other assets, such as infrastructure or private debt investments, that have fixed return characteristics. This will ensure that "at least, the assets and liabilities will move in tandem as the market changes.” These investments are slightly less liquid than bonds, but provide a higher yield premium, he says.
Going under the radar
Cash transfers can be more challenging for the plan sponsor and the insurer that assumes its risks, Eric Jobin adds. “A cash transaction forces the pension fund to sell its assets, and it may not get full market value. A transaction of this size involves large volumes and does not go unnoticed, especially in the Canadian markets in a single day.”
For the insurer, receiving a cheque rather than assets forces it to deploy cash overnight, adds Jobin. “In such large transactions, the markets see us coming. The sellers know we have no choice but to buy.”
In an asset transaction, the insurer can take time to digest the amount, Jobin adds. “In our case, this allows our investment teams to deploy the market risk hedging strategy, for example. We aim to hedge the interest rate risk on the day of the transaction. Otherwise, the risk might change during the day. For example, a difference of 10 basis points (0.1 per cent) can move the value easily by 1.5 percent for the insurer," he says.
No reinsurers in the picture
No reinsurers are participating in the transaction. Tessier says he worked with the reinsurers on this file with Willis Towers Watson. However, Sun Life was able to solve, as he describes it, “a sizable problem on our balance sheet. We know we have their support, but chose not to act on it as part of this transaction.”
Tessier points out that Sun Life has used reinsurance only once in pension risk, in 2015 when it concluded a longevity insurance contract with BCE for $5 billion in coverage for the Bell Canada employee plan. RGA Canada and SCOR Global Life were the reinsurers involved. All the same, he believes that global reinsurers can play a role in driving the growth of the Canadian market.
iA holds a similar view. "We've thought a lot about longevity risk over the last few years and we've concluded that we're comfortable taking that risk on our balance sheet: $630 million is within our risk appetite," Jobin says.
Long-standing problem
General Motors’ pension plan has long weighed on its results, on a global scale, especially since the financial crisis of 2008-2009. Moshe Milevsky, afinance professor at the Schulich School of Business, York University, in Ontario, demonstrated this point in his talk at the Million Dollar Round Table (MDRT) Conference in Indianapolis, in June 2009. There he shared data that suggested that GM had the highest pension costs per car sold of any major automaker.
The auto giant threw in the towel in 2012, completing a US$26 billion buyout annuity transaction with Prudential. It thus transferred all of its employee pension plan assets and liabilities to the insurer.
Tessier mentions that the U.S. GM transaction triggered a wave of similar transactions. The plan risk transfer market totalled $4.6 billion in 2018, $5.2 billion in 2019 and $4.4 billion in 2020, he notes. Aside from the pause caused by COVID-19 that pressured 2020 results, the market has doubled since 2013, when it reached $2.2 billion, according to actuarial firm Eckler's Pension Risk Transfer Report, released in May 2020.
