Group Annuity Market Pulse – Second Quarter 2024

WTW Annuity Purchase Index

¹For 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.
²Excludes longevity insurance agreements.
³Sources 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.

Key observations

• We estimate that $3.7 billion of group annuities were placed during the first two quarters of 2024.
• CPI-linked annuities represent approximately $1.4 billion of market volume.
• The pipeline for the remainder of the year is very busy with transaction of all sizes.
• The total 2024 market volume is now projected to exceed $9 billion.

Market insight

The Canadian group annuity market is on track to break records in 2024:

1. We witnessed the largest group annuity sales volume ever recorded, reaching $3.7 billion in the first two quarters;
2. WTW completed the largest indexed deal and the largest transaction with a single insurer, estimated at slightly above $1.2 billion; and
3. We already surpassed the previous annual record for deals with pensions linked to inflation, with a volume of $1.4 billion.

In fact, our current best estimate for total group annuity sales in 2024 is between $9 billion and $10 billion for over 150 transactions, which would be the largest volume ever recorded in a calendar year.

Affordability continues to propel the Canadian group annuity market. Most pension plans continue to be fully funded, including many plans with pensions indexed to inflation, which previously lagged behind non-indexed plans. We continue to see an increasing number of plan sponsors taking steps to reduce risks within their balance sheets by securing their funded positions either through pension risk transfer activities, asset de-risking strategies, or both. With less than 15% of Canadian DB pension liabilities insured in the private sector, the remaining uninsured liabilities should lead to a healthy pipeline of group annuity transactions for the foreseeable future.

Most insurers continue to increase their risk capacity to keep up with the higher demand, and annuity pricing has kept pace as well. However, average participation on a given deal has decreased as insurers become more selective, prioritizing deals that meet their criteria. Exclusive deals, where a preferred provider is selected by the plan sponsor and the transaction is enacted based on pre-established pricing triggers, are gaining in popularity. As always, plan sponsors who are “transaction ready” (i.e., those who have conducted early diagnostics of the underlying membership data and ensured internal governance readiness) can nimbly take advantage of market timing opportunities. Additionally, clean data can influence the insurers’ decision to participate in a given transaction.

Price of annuities

Using our WTW Real-Time Annuity Tracker, we 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. Additionally, 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.

• The absolute level of annuity cost is determined by the implied gross rate offered by insurers, illustrated by the purple line in the graph (the higher the rate, the lower the absolute cost). It is mostly relevant for plan sponsors swapping equities for annuities. In 2024, the absolute yield of purchasing annuities continues to hover around 5%, which is significantly above the historical average, resulting in lower absolute costs compared to historical averages.
• The relative level of annuity cost is determined by the level of spread offered by insurers in excess of long-term risk-free rates (government of Canada (GoC) 10 years), illustrated by the pink area in the graph (the higher it is, the lower the relative cost). It is mostly relevant for plan sponsors swapping bonds for annuities. In 2024, the spreads offered by insurers over GoC 10-year bonds averaged 160 basis points. These levels remain competitive and above historical averages, resulting in lower relative costs compared to historical averages.
• Although pricing continues to be competitive and better than historical averages, it slightly increased in 2024 compared to some periods in 2023 when prices were at their all-time low (in both absolute and relative terms).
• The yields offered by annuities have been comparable to yields on high quality corporates (AA) and greater than provincial bonds.
  • This translated into some transactions completed with a balance sheet gain (i.e., annuity premium lower than corresponding accounting liabilities).
  • Plan sponsors holding a large proportion of their assets in a mix of provincial and corporate bonds must ensure that other asset classes generate sufficient excess return to keep up with the solvency liability growth rate and plan management fees.
• As of June 30, 2024, the yields offered by insurers, derived from the CIA Guidance for indexed annuities, is 3.4% lower than the yields offered for non-indexed annuities. This gap suggests that the inflation risk premium remains high. Deals advised by WTW, following a thorough and transparent go-to-market approach with insurers, have resulted in a lower inflation risk premium charged by the insurers.

Update on mortality assumptions impacting pensions plans

In April 2024, the Canadian Institute of Actuaries (CIA) published a new scale of Canadian mortality improvements, suggesting higher life expectancies to be expected over time compared to the current scales used by most plan sponsors. The CIA has not yet disclosed any guidance on the practical implementation of this new scale for calculating commuted values or estimated cost of annuities as part of the actuarial valuation report for the solvency/windup valuation basis. The CIA is also expected to release a new base mortality table for pension plans within the next 12 months, which may trigger additional discussions on mortality.

Mortality assumptions, both base tables and improvement scales, are even more important for insurers and reinsurers. However, most use their own assumptions to price group annuities, determined using their own data, qualitative and quantitative analysis, and beliefs. While these mortality updates from the CIA are prompting most players to engage in debates and review their own assumptions, we do not expect to see abrupt changes in annuity pricing in the near term as a result of the CIA update on mortality.

Regulatory and other updates

There have been multiple lawsuits in the U.S. concerning annuity transactions placed with one insurance company, with plaintiffs claiming that fiduciary duty might have been breached by prioritizing financial outcomes over selecting the safest annuity provider. While balancing benefit security and pricing is also relevant in Canada, the Canadian group annuity market differs in several ways. For example, the regulatory approach to capital is different: insurers in Canada have strict and uniform requirements nationwide whereas regulation is at the state level in the U.S. The Canadian market is also more concentrated, with only 8 active players compared to over 20 insurers participating in the U.S.. The backstop protection provided through Assuris can cover up to 100% of the monthly pensions under a buy-out policy in Canada. In contrast, the equivalent protection in the U.S. is set at the state level and is less comprehensive, especially for high pensions. Refer to our Q2 2023 market pulse for more information on current Assuris coverage in Canada.

At WTW, we assist our clients in conducting a detailed qualitative and quantitative review (i.e., due diligence) of all the participating insurers to meet fiduciary requirements, prior to receiving the bids.

Shifting our focus back to Canada, new legislation continues to be introduced to regulate the sharing, storage and use of personal information. This impacts group annuity transactions, especially in the case of a buy-out policy. While best practices with respect to cybersecurity and protecting personal information were already in place, these new requirements are prompting insurers and plan sponsors to further enhance their processes and document them as part of the annuity contract. The increased scrutiny on this topic is applicable for all jurisdictions and should be part of the insurers’ due diligence process

About WTW group annuity purchase team

The WTW group annuity team has extensive expertise and experience in Canadian group annuities helping to provide the best outcomes for our clients: