Sun Life team examines pension risk transfer questions

The pension risk transfer market (PRT) has seemingly evolved from out of nowhere over the last 15 years to become a dynamic, solutions-oriented market creating multi-million and billion dollar transactions for companies interested in transferring their pension plan risks to insurers.

“Today, more plan sponsors than ever are considering group annuities as a de-risking solution,” the defined benefits (DB) solutions team at Sun Life Financial writes in their article, Innovation in pension risk transfer – meeting more challenges for Canadian DB plan sponsors. Addressing a number of questions often asked by plan sponsors and industry partners, they say the industry is innovative, and adds that each of those innovations is then further used to help other plan sponsors. “That cycle opened the market to solve the next cohort of challenges,” they write. Innovations to date include the creation of buy-in polices, the formation of much larger transactions, risk transfers related to active plans with active plan members and finding solutions for inflation-linked plans.

The General Motors transaction in 2020, for example, worth more than $1.8-billion, is the largest pension risk transfer arrangement in Canada to date. “This jumbo deal was innovative in terms of the combination of market capacity, structure and competitiveness.” Key challenges in structuring a deal of that magnitude include asset origination – greater investments are required for larger deals – and longevity.

“Refining assumptions can lead to significant price changes. A small change in longevity views applied to a large group of retirees can result in a sizable change in price for the transaction,” they write.

They also discuss inflation, hedging inflation-linked liabilities, deal timing and risk sharing.

“Clarify the plan sponsor’s objectives upfront,” they conclude. “In many cases, discussions jump to available solutions. It’s important to start with the challenge or a clearly defined objective. This allows opportunity for innovation, versus going right to execution with existing solutions. Involve consultants and insurers early in the process.” 

Finally, they say be open to innovation. “Customized solutions are becoming the rule, not the exception The Canadian PRT market has the expertise and track record to break new ground successfully. Innovation will continue to drive new de-risking solutions for DB plan sponsors.”