1 For 2008 to 2012, the breakdown of sales between buy-in and buy-out for terminated plans and buy-out for ongoing plans is not available.
2 Excludes longevity insurance agreements.
3 Sources of data: LIMRA, Assumption Life, BMO Financial Group, Brookfield Annuity, The Canada Life Assurance Company, Co-operators Life Insurance Company, Desjardins Financial Security, iA Financial Group, RBC Insurance and Sun Life Financial.
We recently released an article explaining how defined benefit plans are at an inflection point after going through a 3-year funded status bull market. This improvement in funded status is allowing plan sponsors to have the affordability to take actions to align with their vision and objectives.
Affordability is also what continues to propel the desire to purchase annuities with many pension plans in fully funded positions. We believe that insurers are able to keep pace with the increase in demand but expect insurers to continue to be selective in their participation criteria, which may lead to a lower participation rate on average for each transaction. This is especially true for smaller deals or more complex ones (e.g., with higher proportions of deferred members).
Transaction readiness is critical to allow plan sponsors to be agile in what is expected to be a busy market for the foreseeable future. As a point of reference, plan sponsors that are “transaction ready” can receive quotes from an insurer within 3 months. However, the process can be much longer (up to 12 months and beyond) if activities such as an early diagnostic of the underlying membership data and internal governance have not been conducted yet.
Using our WTW Real-Time Annuity Tracker, we can track the cost of annuities and assess the true competitiveness of quotes received from insurers by reflecting the evolution of credit spreads in real-time. In addition, the WTW Real-Time Annuity Tracker reflects the mortality profile of specific cohorts based on socio-economic factors obtained from an analysis of the members’ data and postal codes.
Price of annuities can be looked at from two different angles – in absolute terms or in relative terms.
Furthermore, we estimate that the yield offered by annuities exceeded the yield on provincial bonds by 60-90 bps throughout 2023. Absent of a major change in economic conditions, annuity pricing is expected to continue to be attractive during 2023.
With the high inflationary environment, we are also witnessing an increase in interest for indexed annuities from plans offering indexed pensions linked to CPI. While some insurers have improved their offering for indexed annuities over the last few years, the yields offered by insurers to secure indexed annuities linked to CPI remain up to 4% lower than the yield offered for non-indexed annuities. This suggest that the cost to hedge inflation risk (i.e., the combination of break-even inflation and the inflation risk premium) remains expensive. Whether purchasing indexed annuities is a viable solution for a plan sponsor ultimately depends on its objectives, affordability and how the plan’s assets are invested. For example, fully indexed annuities offer a yield comparable to real-return bonds but generally provide a lower yield than most other type of assets. A detailed feasibility study is highly recommended to understand the pros and cons of purchasing indexed annuities.
Assuris - On May 25, 2023, Assuris announced that it increased its protection levels for different insurance products should an insurer fail. This change is effective immediately and positively affects millions of existing and upcoming policyholders across Canada. The table below compares the prior and current Assuris protection for annuitants collecting a monthly income from an insurance company. More information is available here.
| Monthly Pension | $0 to $2,000 | $2,000 to $5,000 | Greater than $5,000 | |
|---|---|---|---|---|
| Prior Assuris Protection | Buy-in | 85% | 85% | 85% |
| Buy-out | 100% | 85% (or $2,000 if greater) |
85% | |
| Current Assuris Protection | Buy-in | 90% | 90% | 90% |
| Buy-out | 100% | 100% | 90% (or $5,000 if greater) |
|
Statutory Discharge - Pension legislation continues to evolve with more jurisdictions allowing for a statutory discharge of the liabilities covered by a buy-out annuity policy. The most recent jurisdiction being added to the list is Saskatchewan as part of Bill 108, which received Royal Assent, but it will only come into force when there is an order-in-council and this will only happen when supporting regulations are drafted and made effective. A statutory discharge is currently permissible for members in British Columbia, New Brunswick, Nova Scotia, Ontario and Quebec. Draft regulations are currently pending for Federal members.
Bill C-228 - The federal legislation that amends bankruptcy and insolvency rules for employers across Canada, cleared the Senate and received Royal Assent on April 27, 2023. This means that the provisions that give super-priority to pension deficits, including over secured creditors, will become effective on April 27, 2027 (given the four-year transition period under the legislation for pension plans in existence when the legislation comes into effect). The new super-priority for pension deficits may cause lenders to review their approach to underwriting credit for employers with defined benefit pension plans. More information can be found here.
The WTW group annuity team has extensive expertise and experience in Canadian group annuities helping to provide the best outcomes for our clients:
#1 firm in Canada over the last 3 years in terms of volume of annuities placed
14 Experienced and growing team of 14 specialists at the forefront of innovation
$13B of liabilities transferred through group annuity purchases representing a third of total historical volume in Canada, including multiple $500M+ transactions
400+ pension plans with robust and comprehensive financing strategy developed by our team
