If, as some market practitioners expect, the Canadian group annuity market will rise to between $4 billion and $5 billion this year — or about 50 per cent more than the record set last year — then presumably it’s important to start the year with momentum.
And that seems to be the case thanks to a $350-million transaction involving Loblaw Cos. that was signed off on late last year but which was only announced Tuesday.
In that deal — which applies to thousands of former Loblaw workers and on which Willis Tower Perrin was the consultant — two insurers have agreed to make the pension payments until the last member of the group passes.
In return, Loblaw will make a one-time $350 million payment to Sun Life and BMO Insurance and get the responsibility for making the on-going payments off the books. In this way the $350 million premium is the deemed present value of the stream of future pension payments.
In a statement, John Poos, group head of pensions and benefits at Loblaw, said the company had “found a winning combination of conditions that enabled us to reduce the financial risks from our defined benefit pension plans at an attractive price in line with the company’s financial objectives.”
Marco Dickner, the Montreal-based retirement risk management leader for Willis Towers Watson, said a strong “competitive bidding process,” helped ensure that Loblaw met its “aggressive financial trigger. If you look at the price compared with what Loblaw was expecting, it was a good transaction.”
The results of work done by Sun Life, the industry leader, on an earlier transaction may have also helped Loblaw. In 2016, the insurer completed a $530 million transaction with two pension plans — an unusual way to transact. But by merging the payment streams for the two funds — both of which offered a form of inflation protection to its retirees — a savings of $20 million was obtained.
Brent Simmons, a senior managing director for defined benefit solutions at Sun Life, said, “we were able to leverage off the intellectual capital we created in the $530 million combo deal,” and create a cost-effective solution for Loblaw.
If you look at the price compared with what Loblaw was expecting, it was a good transaction
Adds Dickner from Willis Towers Watson: “Inflation-linked pension benefits, were previously perceived to be expensive and not readily available from insurers. Now the market is opening up for index annuities.”
The Loblaw pension de-risking transaction — its second following a different deal done a few years back — is noteworthy because it was able to offload the three key risks, investment management, longevity and inflation adjustment, to the two insurers.
The last risk was significant because only about half of the $1.5 trillion defined benefit pension market offer inflation-linked benefits to their retired members. (On Loblaw’s earlier de-risking deal, the retired workers didn’t receive inflation adjustment payments.) At times, it’s tough for insurers to find products that hedge out the inflation risk.
But de-risking deals for pension funds that offer inflation linked payments have been done. In mid-2013, for example, The Canadian Wheat Board purchased a $150-million annuity policy from Sun Life that transferred investment, longevity and inflation risk to the insurer.
Now the sector is expanding. In the fourth quarter of last year, Sun Life was involved with three such inflation-linked transactions valued at around $500 million. (In all, an estimated $1.2 billion of group annuity business was written in the quarter.)
On its deal, Loblaw only de-risked part of the pension plans. Accordingly, the plan is still active meaning that the fund kept some of the assets for the members who are still employed.