Demographics, management fatigue, and a $13 trillion savings gap highlighted by Brookfield Annuity CEO
Janice Madon is keenly aware of the growing savings gap in Canada. The President & CEO of Brookfield Annuity sees in an aging Canadian population a growing range of risks. The baby boomer generation is retiring in large numbers now and living longer than many had ever expected they would. Subsequent generations are not filling the gaps left in the workforce fast enough, nor are many of them entering pension plans and balancing the growth in pension liabilities. On top of all that, Madon cites data from the World Economic Forum which estimates that Canadians have saved $3 trillion less than what they need. That same data offers a worrying estimate: that the savings gap will grow to $13 trillion by 2050.
A driving force behind that gap is the steady decrease in Canadians able to access defined benefit pension plans. While driven by a range of reasons, Madon highlights the burden these plans place on an employer as a key reason for their rollback. She notes that many employers who still have DB plans on their balance sheets want to ensure retirement certainty for their employees, but run the risk of the plan being underfunded, or becoming more focused on plan management than they are on their own business. That’s where Brookfield Annuity steps in.
“Because of this gap, what employers and Canadians need is some certainty around their retirement savings and subsequent retirement income going forward,” Madon says. “In their quest for certainty, plan sponsors are looking at transferring the risk of [their] pension plans and getting it off their balance sheet and onto our balance sheet. Transferring that risk, as well, allows the employer to focus once again on their core business.”
The sheer work of managing a DB plan’s funded status, controlling for longevity risk, and making asset allocation decisions has prompted more and more employers to offload their pension risk onto life insurance companies who act as a group annuity provider. Madon says that the Canadian market for pension risk transfers has been around $11 billion in the past year.
Another driver in this risk offloading has been the relatively recent rise in interest rates. As rates go up pension obligations go down, usually more than the assets being held, to eventually pay these benefits. This means more pension funds have hit funded status, making them more attractive in the pension risk market. Interest rates are falling now, which may change that calculus, though Madon believes timing the group annuities market may be a somewhat flawed enterprise.
The work of pension risk offloads is somewhat complex. Madon used the example of a recent transaction Brookfield Annuity secured with an employer. The work began with the employer hiring an external consultant, gathering the opinion of an actuary on the size of their liability, and examining the assets they have. Once brought to market, the pension is functionally put up for auction with the eight players in Canada bidding for pension plan’s liabilities.
For a bidder like Brookfield Annuity, the data provided about a plan is essential to the pricing. That data enables the bidder to assess longevity expectations of the membership as well as the assets held by the plan. Those key points will be able to inform the asset and liability mix that determines the value of this transaction for a group annuity provider. Madon says that if an employer wants to make their plan more attractive to a group annuity provider, they should ensure their data is accurate and comprehensive.
Within the wider market for pension risk transfers, Madon believes Brookfield Annuity has set itself apart. She cites the investment expertise they have access to through Brookfield Asset Management, a leading global alternative asset manager with a 125-year legacy of owning and operating global businesses. The long-dated nature of Brookfield’s investments in sectors such as infrastructure aligns with the company’s obligations to policyholders, according to Madon.
As employers and plan sponsors stare down the various coverage gaps and management issues facing their DB pension plans, Madon argues that there is a case for pension risk offloads for the core fundamental reason of a return to a company’s core business focus.
“Plan sponsors are thinking about the gap their employees are facing, and they are looking for certainty. They're staring down a gap like that and thinking it's on their shoulders to fix,” Madon says. “The more certainty you can provide your employee the better job you’re doing, I think, in looking after your employees.”
