Group annuity market growing as DB pension plans move to de-risk | Benefits Canada.com (2024)

Ford of Canada’s recent transfer of $923 million in pension liabilities to Desjardins Group, RBC Insurance and Sun Life Assurance Co. of Canada augurs well for what has been a rapidly expanding group annuity buyout and buy-in market.

“As of 2013, the group annuity market amounted to about $1 billion annually,” says Charbel Assal, senior director of retirement risk management at WTW Canada, which has advised on $60 billion in pension risk transfers, including the Ford transaction, over the last decade. “But that’s grown to about $8 billion for each of the last three years.”

Read:Ford Canada transferring $923 million in pension liabilities via group annuity buyout

Prior to 2013, the market consisted mostly of terminated and smaller plans. But, as the trend to de-risking took hold among larger plans, the market shifted so that some 80 per cent of transfers now occur for de-risking purposes and only 20 per cent are for termination.

“Based on the transactions now in the pipeline, our prediction is that the market will hit $10 billion this year. So there’s definitely a growth trend, though perhaps not the eight-fold increase we’ve seen in the last 10 years.”

The primary driver of growth in the group annuity is the improvement in DB pension plans’ finances, said Assal. “[Public equities have] performed well in the past few years and interest rates have increased significantly, improving plans’ funded status and decreasing their liabilities, which, in turn, makes it easier for plans to meet statutory discharge requirements and allows them to purchase annuities without putting extra cash into the transactions.”

Read:GM Canada transferring $1.8BN in pension liabilities via group annuity buyout

The emergence of pension discharge legislation in the last eight years has also proved vital. “Before we had this type of legislation, purchasing an annuity did not relieve companies of the risk should the insurer collapse, for example, but the full discharges that are now available have certainly helped to grow the market.”

In 2016, Quebec became the first province to enact discharge legislation. British Columbia, Ontario New Brunswick and Nova Scotia followed, while similar legislation in Saskatchewan is expected to come into force shortly. The federal Bill C-228 received royal assent in April 2023 but will only take effect in 2027.

Still, as in all markets, there are uncertainties. “The continuation of the current interest in annuities depends on whether DB pensions continue to be well-funded, but also on whether insurers want to be in this business and offer competitive rates,” said Pamela Odina, a lawyer with Brown Mills Klinck Prezioso LLP.

Read:Majority of U.K. DB pension plan sponsors favour annuity buyout as long-term strategy: survey