Illustration by: Colin McRae

Defined benefit pension plan sponsors transferred $11 billion of pension risk to group annuities last year, according to a recent report by Sun Life.

“What we’re hearing from pension plan sponsors is given all this uncertainty in the world, especially around their core businesses, reducing uncertainty in their pension plan is a helpful thing,” Brent Simmons, senior vice-president and head of defined benefit solutions at Sun Life, said in an interview.

Of the $11 billion in transactions, $3.3 billion were for inflation-linked annuities. The demand for inflation-linked annuities was only $2.5 billion for the three-year period from 2021 to 2023.

Furthermore, around 25 of the 130 plan sponsors that purchased group annuities were repeat customers, totalling $4.6 billion in premiums.

Growth in the Canadian group annuities market tends to jump up, then level out before rising again, Simmons said. It hovered at around $4.5 billion in 2018-20 and stayed steady at about $7.8 billion in 2021-23 before jumping up to $11 billion last year.

“I wouldn’t be surprised if we saw some consolidation around that $11 billion number for a number of years before it perhaps reached new heights,” Simmons added.

Five main factors drive plan sponsors’ appetite to transfer pension plans, Simmons said. They are: the plan’s funded status, size, volatility, the price of annuities, and how much time the sponsor spends maintaining the plan.

Interest rates are a driver of funded status, or the plan’s ability to keep its promises to pay its members, but it doesn’t make a big impact on sponsors’ desire to derisk as their assets are usually well hedged.

Many sponsors have structured their assets to make the pension plan more bond-like, Simmons said. “When interest rates change, the pension liabilities change at the same time, so the plan stays more or less similarly funded.”

When employers transfer pensions to insurers, plan members always have questions about what this means for their retirement. Insurers and employers should communicate clearly to members that the pension benefits and terms are still the same, Simmons said.

Members could be reminded that insurers are held to a more stringent regulatory standard than pension plans, Simmons said. Insurers must be always fully funded with margins for rainy days and are insured by Assuris in case they go belly-up.

Meanwhile, pension plans don’t have to be fully funded. If a company declares bankruptcy, members of their defined benefit pension plan may not receive everything they were promised, he added.

“Be as transparent and open as possible,” Simmons said. “Members are generally quite happy and getting that peace of mind that their pension is now being paid by an insurer.”