The Canadian defined benefit (DB) pension industry has seen many developments since 2009, and these have provided DB plan sponsors with a full range of innovative de-risking solutions. Two recent transactions highlight how two Canadian plan sponsors used these innovations to tackle significant challenges within their DB plans. Both of the transactions are outlined in the below case studies:
Case Study 1: Canadian Wheat Board
Historically, the Canadian Wheat Board (CWB) had been the exclusive marketer of Canadian grain and barley. Today, however, other companies are allowed to compete, and the organization has had to transform in order to align with the new mandate. Its consumer-price-indexed DB plan was a legacy issue, and CWB wanted to transfer the risk with annuities.
The challenge? A $150-million purchase of indexed annuities had never been done before. Could CWB do it at a reasonable cost?
The solution? CWB worked with its consultant and an insurer to create a custom solution. The insurer created an LDI bond portfolio over time to meet the budget. At the right moment, $150 million in assets were transferred in-kind to the insurer to purchase an annuity buy-in. CWB successfully transferred its pension risk within budget and can turn its focus to its new mandate.
Case Study 2: Anonymous employer
This employer had a large DB plan with a strong legacy of investing in equities, which was causing volatility in its accounting disclosures. The employer wanted to maintain the DB plan but needed to reduce the impact of the plan on earnings per share. It wasn’t an easy decision; reducing equity exposure could limit performance and lead to increased contributions. Should the objective be risk reduction or cost containment?
After a long deliberation, the board chose risk reduction. The solution included:
- Developing a custom LDI benchmark based on accounting liabilities
- Creating a bond portfolio to match the benchmark
- Setting automatic trigger points to move equities to bonds over time
In the end, the employer’s earnings per share volatility was immediately reduced, and the firm could go back to focusing on its core business.
Lessons learned
The two case studies contain some valuable lessons. First, education and communication are critical to ensure buy-in from board members and other stakeholders. They also show that LDI is a valuable a tool as a standalone solution or a transition strategy to fully transfer risk. Finally, planning ahead pays off and ensures that opportunities aren’t missed.
Heather Wolfe, FIA, FCIA, FSA, is managing director, client relationships. Steve Morris, CFA, is managing director, liability-driven investing.