Head of DB solutions at Sun Life outlines why 2025 might be the year for plan sponsors to consider transferring their pension risk
The pension risk transfer (PRT) market is on an aggressive growth trajectory, with 2024 marking a “record smashing” year in Canada.
As Brent Simmons explained, the market is estimated to have hit nearly $11 billion, a sharp increase from $7.8 billion in 2023, resulting in an overall 40 per cent year-over-year growth.
One of the reasons that’s attributed to this growth is because “pension plans are incredibly well funded,” said Simmons, head of defined benefit solutions at Sun Life.
He pointed to Mercer’s Pension Health Pulse that estimates the median pension plan in Canada was 125 per cent funded at the end of 2024, giving plan sponsors ample opportunity to de-risk.
This well-funded position, combined with cost-effective annuities, market volatility, administrative burdens, and member security concerns are driving an increasing number of sponsors toward pension risk transfer solutions.
One of the solutions he expects to drive this growth are annuities, emphasizing that annuities are more affordable than most realize.
"The yield on an annuity compares really favourably to a corporate bond index, especially if you take into account the fact that you're transferring risk over to an insurance company," he explained, while also acknowledging that pension volatility has long been a concern.
"Plan sponsors have been on a rollercoaster for decades," Simmons said. "At times, their funded status was much, much lower than 125 per cent, forcing them to inject cash or face unexpected accounting results. Many are now looking to get off that ride."
Simmons emphasized the notable phenomenon the PRT market is witnessing with the rise in repeat buyers. These are sponsors who have completed at least one previous transaction and are coming back for more, he explained.
"We saw more than 25 repeat buyers during 2024," Simmons said. “That just speaks to the usefulness and the value of pension risk transfers to plan sponsors. It’s becoming a tried-and-true phenomenon.”
Beyond financial concerns, the operational demands of managing pension plans are also pushing sponsors toward annuity solutions.
"There's a bunch of assumptions, investments, and manager selection involved. Pension plan sponsors can spend a lot of time thinking about their pension plans," he said.
Transferring risk to an insurer simplifies these complexities, allowing organizations to focus on core business operations.
Additionally, plan sponsors are recognizing the benefits to retirees. Simmons explained that purchasing an annuity means that plan members will now have their monthly pensions paid by an insurance company whose business it is to keep those promises and pay those pensions. The security of guaranteed payments from a highly regulated insurer ultimately offers peace of mind for both employers and retirees.
While PRTs are gaining momentum, other risk-mitigation strategies are also at play. Some plan sponsors are increasingly investing in fixed income portfolios designed to mirror liability movements.
"You get into this nice, harmonious spot where your assets and liabilities are moving in similar directions," Simmons explained. “Interest rates may go up but it impacts both your liabilities and your assets similarly, or interest rates may go down and the same thing. If we're thinking about funded status, those two things moving in the same direction is amazing because it keeps your funded status a lot more stable.”
However, Simmons was quick to highlight an important reminder for those making a PRT transaction: to be really clear about the data and getting it right.
He added pension plan sponsors need to be clear on who all the annuitants are as well as their beneficiaries, how much pension they get when they pass and whether the pension continues to their spouse.
“We would call data risk as being one of those things when you do a PRT transaction that you want to spend some time mitigating,” said Simmons. "We see plan sponsors doing data cleanup exercises, conducting audits, and making sure everything is in order before executing a deal.”
Among the other risks driving sponsors toward annuities, longevity and investment risk stands out as the most critical, noted Simmons, adding that a sudden downturn could quickly erode strong funding levels, making risk transfer an attractive pre-emptive move.
"We've had a really good run in the markets for a number of years. At some point, there may be a correction," Simmons said. “Those corrections can be very sudden and very severe, and a plan sponsor may go from being very well funded to not being very well funded at all.”
Inflation risk, a subset of investment risk, is another growing concern. Certain pension plans provide inflation-linked benefits, meaning payments increase with the Consumer Price Index (CPI). Given the recent volatility in inflation rates, more sponsors are offloading this risk to insurers.
While the persistent myth around annuities is the high cost, Simmons dismissed this notion, emphasizing that “annuities are actually pretty cheap,” he said, comparing them to corporate bonds.
“Annuities offer better yields while eliminating longevity, investment, and operational risks,” he said.
"That myth of annuities being expensive disappears quickly when you realize they’re actually a really good deal," Simmons added. "Many plan sponsors think of annuities as a special type of fixed income, one that perfectly hedges liabilities and transfers all the risk.”
