If favourable pricing alone is not reason enough for a plan sponsor to consider purchasing annuities, the new ‘Pension Protection Act, Canada is another strong incentive, says an Eckler ‘PRT Insights.’
If favourable pricing alone is not reason enough for a plan sponsor to consider purchasing annuities, the new ‘Pension Protection Act, Canada is another strong incentive, says an Eckler ‘PRT Insights.’
The act makes special payments to a pension plan a super-priority for a company restructuring under the Companies’ Creditors Arrangement Act and makes the special payments and plan deficit a super-priority when a plan sponsor is placed into bankruptcy. This puts the pension plan ahead of lenders, including secured creditors.
Although the full impact of the new act will not be seen on existing defined benefit plans until it takes effect in four years, plan sponsors would be prudent to take steps now to mitigate against potential future risk, says Eckler. While a plan sponsor may not currently be at risk of insolvency, and the pension plan may not currently be underfunded, given today’s high-interest rates and market volatility, coupled with the fact that the act places pension deficits in priority over all creditors, plan sponsors may begin to find it more challenging and/or more costly to obtain financing. Purchasing annuities can be an effective way to transfer pension risk from a plan sponsor to an insurance company, which can serve to reduce the risk of the plan sponsor in the eyes of lenders, it says.
For pensioners and deferred vested members who were employed in Ontario, British Columbia, Nova Scotia, New Brunswick and Quebec, the plan sponsor is able to fully discharge the pension liabilities after the annuity purchase. This means that any risk associated with those pension liabilities is completely transferred from the plan sponsor to the insurance company.
The process of purchasing annuities can take several months to complete as it is important to ensure that the data used is complete and current before going to the industry for annuity quotes. The sooner a plan sponsor starts the process, the sooner these risks are removed from the pension plan and the company balance sheet, it says.
