We are pleased to announce that the WTW Group Annuity Market Pulse is expanding to include the pulse on DB plans risk management. To that effect, various benchmarking and observations on risk management trends will be included going forward. With the large majority of plans in surplus position, topics of strategic discussions changed from reducing deficits to dealing with surplus.
The windup funded position of the DB plans for which WTW is the appointed actuary in Canada has significantly improved in 2024, bolstered by excellent market returns and relatively stable year-over-year interest rates.
About 80% of plans are now in surplus positions, and 40% of plan sponsors benefit from contribution holidays.
In average, open plans funded positions improved by 9% while closed/frozen plans’ positions improved by 5%. Main difference between the two comes from the significant returns generated in the equity market in 2024.
While open plans still broadly use regular equities, they tend to have a more diversified asset mix composition, including real assets, alternative credit and private equities. Not surprisingly, closed and frozen plans invest a heavier portion of their assets in liability-hedging assets, thus preparing for their DB exit in a more liquid and controlled risk environment. The extent to which plans invest in liability-hedging assets can be influenced by a prior buy-out annuity purchase.
A record $11.0 billion in group annuity sales was placed in 2024, including $3.3 billion of indexed annuities.
There was no change to the market participants in 2024. However, all insurers increased their capacity, with five insurers exceeding $1.5 billion in sales (compared to two in 2023).
We expect insurers’ capacity to continue to grow to keep up with demand. In fact, multiple reinsurers are interested in participating in the Canadian market, which will further increase supply as necessary.
One of the main drivers for the high market volume in 2024 is the prevalence of jumbo transactions (i.e., $500 million+). Historically, jumbo transactions posed challenges, but they now present advantages to plan sponsors due to better participation and flexibility. 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).
We estimate that the market would now be able to absorb transactions up to $4 billion in size in a single day with the appropriate strategy and planning.
Many exclusive deals were completed in 2024 with a positive outcome for plan sponsors. Skilled consultants are establishing new processes to select the right partner for an exclusive deal that meets both the financial and non-financial objectives of the plan administrator and the plan sponsor. Competitive deals are still the most prevalent approach for small and complex transactions, but exclusive deals allow for additional flexibility and competitive pricing generated by putting the selected insurer partner against the prospect of no transaction. This makes the group annuity market inclusive; there is room for any type and size of transaction!
Yields on annuities continue to hover slightly below 5%, which remain significantly above pre-2022 averages, resulting in lower absolute costs.
In fact, implied yields offered on annuities are currently comparable to yields on high quality corporate bonds. This translated into multiple transactions completed with a balance sheet gain (i.e., annuity premium lower than corresponding accounting liabilities).
Insurers’ appetite for group annuities continue to be very strong, and they have access to increasingly sophisticated investment solutions that provide attractive yields to plan sponsors to fuel their interest.
We continue to secure favourable pricing for CPI-linked annuities, with pricing offered by insurers up to 5% more competitive than those suggested by the CIA Guidance. The main factors influencing the pricing are the indexation formula, the underlying mortality profile and group size. This suggests that indexed pension plans with deficits of 5% or less on a windup basis may be able to complete a transaction without needing an additional cash contribution. 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.
WTW advised on over 70% of indexed annuity volume in 2023 and more than 90% in 2024.
With all the economic uncertainty, group annuities might be a prudent consideration in 2025
The beginning of the year has been characterized by market uncertainty, especially for the Canadian economy. Annuities can offer a full transfer of all risks embedded within a pension plan. All insurers participating in the group annuity market confirmed their commitment for 2025. Although it is too early to discuss trends and too few transactions were completed to expand on pricing, we generally expect pricing to continue to be competitive and aligned with recent experience.
The future is bright for the group annuity market
The improved funded positions discussed above prompted many plan sponsors to take steps toward reducing risks on their balance sheets as they look to secure their strong funded positions. This could involve pension risk transfer activities, revisions to their investment strategies, or a combination of both. For many plan sponsors, the next logical step may be to consider group annuities, which should continue to be a prevalent risk management tactic for plan sponsors in the upcoming years.
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. 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.
The WTW Group Annuity Purchase 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 five years in terms of volume of annuities placed, including over 50% of the entire market and 90% of the indexed annuities market in 2024.
18 experienced specialists, plus a growing team, at the forefront of innovation.
$20B+ in liabilities transferred through group annuity purchases, representing over a third of the total historical volume in Canada, including multiple $500M+ transactions.
500+ robust and comprehensive financing strategies for pension plans developed by our team.
