Are annuities super bonds?
BY Yaelle Gang | February 15, 2019
Last year was a strong year for the Canadian annuity market and the start of 2019 is looking promising as well, said Marie Desrochers, director of client relationships and defined benefit solutions at Sun Life Financial, speaking at a CI Institutional Investment Management event this week.
While official year-end numbers aren’t out for 2018, Sun Life estimates show annuity buy-ins and buyouts in Canada were around $4.7 billion. “So that’s a $1 billion jump from 2017,” she said.
It’s a very exciting time and plan sponsors’ increased focus on good risk management is helping drive the growth, she said. “The annuity buyout product was used historically only for windups, so in the context where the plan was being terminated. It’s not the case anymore.”
The area driving the growth is voluntary transactions, noted Desrochers, adding Sun Life estimates for 2018 show 80 per cent of sales were voluntary for plans not in a windup situation. “That means that plan sponsors are not doing that to get rid of their pension plan altogether, but just to reduce its size, reduce its risk and focus on the core business.”
The defined benefit model hasn’t worked well over the past 20 years, she said. “In that new world, the traditional pension plan, the traditional asset mix of 60/40, it hasn’t been really successful. And in some cases, it has destroyed shareholder value or, in some cases, like Sears, for example, it has put retirement at risk for participants,” she said.
Also, de-risking is on the rise despite Ontario and Quebec both making legislative changes to solvency rules, she noted. “The good news here is there are solutions available and plan sponsors have found them attractive. That’s why we’re seeing a growth.”
Desrochers likes to call annuities ‘super bonds’ because the plan pays upfront and then receives cash flows to match benefit payments, and the ‘super’ part comes from the additional benefits like longevity risk protection and the decrease in time and attention needed for running the DB plan, she said.
While 2018 saw large annuity deals, Desrochers noted Canadian plan sponsors are shy to talk about their deals publicly compared to their counterparts in the U.S. and U.K. “In Canada, there’s so many big names, big companies doing these deals . . . but the list of the ones that have been talking publicly about it, it’s very limited.”
One company that’s gone on the record is Husky Energy, which purchased a $45 million annuity buy-in — the first deal for active members, she said.
While 2019 is just beginning, Desrochers predicted it will likely be a busy year.
“It’s a very lumpy market. It’s fueled by voluntary transactions and it’s impossible to predict where it’s going to go, but there’s no real reason in our opinion that things will slow down,” she said, noting Q1 is typically quiet, but that hasn’t been the case so far.