Where there’s a growing demand, there’s also a growing supply as Canadian plan sponsors seek to better manage their balance sheets by laying off funding risk through annuities. This was a key takeaway during a panel discussion focused on how and why Canadian pension funds are turning to annuities.
For John Poos, group head of pensions and benefits at George Weston Ltd. and Loblaw Companies Ltd. – Canada’s largest business by both revenue and head count – it meant first moving 17 different pension plans into a fully funded position. But before tranching them out, he had to convince a board wary of legal risks, and divide the workings of a marketplace where decisions have to be made in the space of a day – a good six months of preparation.
“You can do a back of the envelope assessment of what your liability looks like relative to your funded status,” he says, “but you don’t know how the market is going to react, you don’t know how anxious the carriers are, you don’t know what kind of pricing you’re going to get. You’re somewhat guessing when is the right time.”
Data – lots of it – helps, says Heather Wolfe, managing director of client relationships, defined benefits solutions, at Sun Life Financial. “The more high quality data the insurance company has, the better the price is likely to be.”
But preparation goes beyond that. In the U.K., where the annuitization market is more developed, carriers have declined to bid on some annuity purchases, saying “do you have your decision makers on board, do you have your governance, do you have a realistic pricing expectation, what shape is your data in?” she notes.
An annuitization “does create legal risk that you need to address and the way you do it is by first having a good governance framework in place,” urges Julien Ranger, a partner specializing in pensions and benefits at Osler.
“Your governance framework should allow the decision- maker to understand in which capacity it is acting when making that decision. There are many decisions involved throughout the de-risking process – some of them are going to be made as a plan sponsor and some others are going to be made as a plan fiduciary.”
That covers the boomerang risk if an insurer goes bankrupt after a plan has been annuitized – which Ontario is addressing – but also such matters as contracts and privacy.
However, the window shuts very quickly, adds Andrew Whale, senior associate and annuity strategist at Mercer: “If you were to just decide today to buy an annuity and go out to the market to see what would happen, it’s luck that you may hit the right day and the right combination of unused demand.” Dialogue with potential carriers and consultants will lead to a more transparent, predictable and defensible outcome.