Group Annuity Market Pulse – Third 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

• IBM Canada Ltd. completed a $1.5 billion buy-out transaction for 6,000 plan members in October. This is the second largest annuity transaction ever in the Canadian market. The transaction was completed with Brookfield Annuity (75% share) and RBC Insurance (25% share). RBC Insurance will act as the lead insurer to provide a single stop administrative experience for plan members starting in May 2025.
• The healthy funded status of pension plans is enabling plan sponsors to proceed with annuity transactions, amounting to a volume of $5.9 billion at the end of the third quarter.
• We estimate that an additional $5 billion in group annuities will be transacted in the fourth quarter, bringing the projected 2024 market volume to over $10 billion.
• CPI-linked annuities account for approximately $2.2 billion of the total 2024 market volume year-to-date, already doubling the amount placed in 2023.

Market insight

Many records expected in 2024 – As highlighted in our previous edition of the Market Pulse, the Canadian group annuity market is on track to set several records in 2024, including the largest total annual volume, the largest indexed annuity deal and the largest annuity deal with a single insurer. The total market volume is now expected to exceed $10 billion. Some insurers have either stopped bidding on new deals for the remainder of the year or are becoming very selective in their participation criteria.

Size matters – When it comes to group annuities, size does matter! The main driver for the high market volume in 2024 is the prevalence of jumbo transactions (i.e., $500 million+). Several such transactions have already occurred, with more expected in the fourth quarter. Historically, jumbo transactions posed challenges, but they are now becoming advantageous. Jumbo transactions are drawing increased interest from insurers, leading to a higher participation rate. Insurers are also more willing to accommodate special requests for bigger transactions (e.g., manual administrative services post-selection, which would otherwise be impractical or too costly for smaller transactions).

Pricing for CPI-linked annuities continues to improve - We continue to secure favourable pricing for CPI-linked annuities, with yields offered by insurers significantly beating those suggested by the CIA Guidance by up to 10%, depending on the indexation formula, underlying mortality profile and group size. This suggests that indexed pension plans with deficits of 10% or less on a plan termination valuation basis may be able to complete a transaction without needing additional cash injections. While two insurers currently dominate the CPI-linked indexed annuity market, other insurers are exploring solutions that would allow them to participate and further improve pricing in the future. It is important to note that indexed annuity deals bring unique challenges that should be carefully considered as part of the feasibility assessment. WTW advised on over 70% of indexed annuity volume in 2023 and more than 90% in 2024.

The future is bright for the group annuity market - Pension plans’ funded status has continued to improve throughout 2024, which is likely to prompt more plan sponsors to take steps toward reducing risks on their balance sheets. This could involve pension risk transfer activities, revisions to their investment strategies, or a combination of both, as they look to secure their strong funded positions.

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 slightly below 5%, which remains significantly above pre-2022 averages, resulting in lower absolute costs compared to pre-2022.
• 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 155 basis points. These levels remain competitive and above pre-2022 averages, resulting in lower relative costs compared to pre-2022.
• Although pricing continues to be competitive and better than pre-2022 levels, it has 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) bonds. This translated into some transactions completed with a balance sheet gain (i.e., annuity premium lower than corresponding accounting liabilities).
• As of September 30, 2024, the yields offered by insurers, derived from the CIA Guidance for indexed annuities, is 3.1% lower than the yields offered for non-indexed annuities. This gap suggests that the inflation risk premium remains high. As mentioned above, 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.

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:

Authors

---

Marco Dickner

Leader, Retirement Risk Management

email Email

---

Charbel Abi-Assal

Leader, Group Annuity Purchase Team

email Email

---