Canada is the cheapest location to insure retiree DB pension obligations, and the United Kingdom is the most expensive location, according to data produced by Mercer.
The newly created Mercer Global Pension Buyout Index provides benchmarks from 18 independent third-party insurers in four DB markets with significant buyout interest: Canada, the United States, the U.K. and Ireland.
According to the index, the cost of insuring retiree obligations in Canada is 5% more than the equivalent accounting liabilities, compared with 8.5% in the U.S., 17% in Ireland and 23% in the U.K.
Mercer says the main reason for the higher cost in the U.K. is mandatory indexation of pension benefits. The index also takes account of regional market conditions, which are reflected in the liability shown in company accounts.
Financial health of Canadian pension plans improved dramatically in 2013, which has created further opportunities to de-risk, says Hrvoje Lakota, Mercer Canada’s head strategist, dynamic de-risking solutions.
“For the first time in more than a decade, some plan sponsors are in an enviable position where they can discharge their pension obligations and take them off their books without having to make additional cash contributions,” he adds. “As a result, 2013 was a record year for the Canadian annuity market, and we expect to continue to see significant growth in the coming years.”
Mercer expects the annuity market to balloon in size as more employers review the implications of a potential annuity buyout or buy-in for their plans. It also expects that this trend will continue and anticipates that historical records for size of annuity placements and volume will continue to be broken.