Nobody told Marco Dickner, leader of the retirement risk management practice at the pension consulting firm Willis Tower Watson that the first rule of forecasting is never give a date and a number. Late last year, Dickner said the group annuity business — which offers pension funds a way to offset longevity and investment risk — would reach $4 billion to $5 billion in 2017.
Now based on first-half trends — an estimated $1.8 billion to $1.9 billion of such insurance has already been provided — Dickner is more than content with his forecast. If $4 billion of such insurance is written this year, which would establish a new record, then the market will have expanded by 50 per cent from the $2.7 billion written in 2016.
“I put pressure on myself with that forecast but I am feeling even more confident,” said Dickner, who bases his enthusiasm on two main factors.
Largest annuity purchase
The first is that the industry recently completed the largest annuity purchase in Canadian history, a $900 million deal with a fund (name not disclosed) that has several thousand members; the second is that the back half of any year typically sees more business get written than the first half.
These come against a backdrop that includes: an improvement in the funded position of Canadian pension plans; entry into the local annuity business of new players who are interested in broadening the scope of what’s being offered; and, on a global level, the trend for pension funds to de-risk and allow companies to focus on their core businesses.
As for the $900 million transaction (known as a buy-in because the sponsor remains the plan’s administrator) Dickner described it as ground breaking, not only for size but also because it included other strategies designed to reduce cost and risk. “The annuity purchase was part of a larger strategy that successfully reduced the organization’s pension plan liabilities by well over $1 billion,” said Montreal-based Dickner, noting the transaction was backed by three insurers, Canada Life, RBC Insurance and Sun Life, an “approach that produced the best price for the company and positive for the sponsor.”
One strategy used was the in-kind transfer of securities, a method where the securities move to the insurer from the fund. (This method contrasts with a cash transfer where the fund sells the securities.)
Brent Simmons, senior managing director of defined benefit solutions at Sun Life, said, “for the larger deals, an in-kind transfer is usually more advantageous to the plan sponsor,” in part because “no parties are out of the market.”
Simmons and Dickner both noted the contrasting approach taken by Canadian pension funds and their European and U.S. counterparts when a group annuity transaction is completed.
Generally Canadians disclose nothing, somewhat surprising given that what’s been transacted is good news given that risk is being given over to an insurer. (Bell Canada, Loblaw Cos., Canadian Wheat Board and Canadian Bank Note are exceptions and have disclosed.)
As to how tight Canadians keep that information, Dickner was asked for the industry sector the latest transaction occurred in and after checking with the company came back empty handed.
But the local industry’s product offerings continues to evolve: in the second quarter a first of its kind transaction was competed where an insurer made a $150 million purchase of buy-out annuities (where the insurer does the administration) and a $45 million buy-in annuity transaction for active members that covers both past and future benefit accruals.
“It was an exhaustive risk transfer approach,” noted Dickner, adding the final terms of the buy-in will be set in two years.