Head of DB Solutions at Sun Life asserts pension risk transfers are heading for more growth and why plan sponsors should consider de-risking pension plans
The Canadian pension risk transfer (PRT) market is poised for its biggest year yet, with industry experts forecasting volumes that could reach $10 billion in 2024. This remarkable growth is a far cry from just over a decade ago, when the entire market was only around $1 billion annually.
"We're on track in 2024 to have the largest PRT market that we've ever had in Canada," says Brent Simmons, senior vice president and head of DB Solutions at Sun Life. "That's just incredible growth that we've seen." He attributes this surge to a fundamental shift in how pension plan sponsors view PRT. Rather than only considering it as a last resort when winding up a plan, more employers are embracing it as a proactive de-risking strategy.
"Folks have recognized that there can be a lot of proactive de-risking benefit in transferring parts of your plan over to an insurance company," Simmons explained. "It shrinks up your plan, it reduces the size of the surprises that you could have, and it allows those companies to get back to focusing on their core businesses."
This trend is particularly notable given the significant role defined benefit (DB) pension plans play in the Canadian economy. A recent report conducted by Healthcare of Ontario Pension Plan (HOOPP), OPTrust and the University Pension Plan (UPP) found that DB plans contributed $34.6 billion to the provincial GDP, highlighting their importance in providing secure retirement income. As Simmons explains, a pension risk transfer happens when an employer transfers a retiree’s pension risk to an insurance company.
“What a lot of employers have recognized is as their pension plans have gotten larger over the years, [and] as more and more of these employees have retired, [employers] are increasingly paying these monthly pensions,” he says.
De-risking essentially helps employers guard against two main risks: longevity and investment risks. If retirees live longer than expected, companies previously needed to inject additional funds into the plan to maintain payment schedules. Whereas, if pension plan investments underperform, employers are again responsible for making up the difference. Through PRT, these risks are shifted to insurance companies, which are better equipped to manage and mitigate them.
Additionally, record-high funded levels for DB pensions have also fueled the PRT market. Rising interest rates and strong equity market performance over recent years have bolstered pension fund statuses. Higher interest rates, for instance, help increase funding levels.
“We've seen interest rates bump up over the last number of years, and we've also seen equity markets be on a bit of a tear for the last few years as well. The combination of those two things together is really helpful for the typical pension plan's funded status,” says Simmons.
While he notes that every pension plan is different, generally most pension plans have equity so “the better the equity markets go, the better shape the pension plan is going to be in,” he says, adding that as interest rates go up, they ultimately help a pension plan's funded status.
The growth of the PRT market has also been fueled by innovation, with new products and solutions emerging to serve a wider range of plan sponsors. In the past, where plans would only consider transferring liabilities, annuity buy-ins, CPI-linked deals, and options for active and deferred members have now expanded the universe of eligible plans. "There's really a broad, diverse spectrum of organizations participating,” Simmons notes, ranging from large manufacturing and mining companies to quasi-public sector entities.
In essence, PRT involves transferring pension obligations from the employer to an insurance company, which then guarantees the annuities to retirees. This transfer offers a “win-win” scenario, Simmons says, as employers can minimize their exposure to market and longevity risks, while retirees benefit from the security of an insurance-backed guarantee.
Looking ahead, Simmons is confident the PRT market will continue to thrive, driven by further innovation and the growing recognition of its benefits among pension plan sponsors.
"I see us on track for a $10 billion year this year and I think there's a lot of value that the pension risk transfer market can continue to deliver for defined benefit pension plans," he says.
With pension plans' funded levels at or near all-time highs, thanks to rising interest rates and strong equity markets, Simmons believes the stage is set for the PRT market to reach new heights in the years to come. After all, he highlights there's also a lot of trust and depth in the market.
“Consultants and plan sponsors feel very confident bringing their deals to market knowing that they're going to get a lot of interest from the different insurance companies that participate,” Simmons said. “I'm really happy to have been a part of it and to have played our part along with all of these other partners in creating a really dynamic and vibrant pension risk transfer ecosystem.”
