Put it down serendipity, or simply plain best of luck.
Unbeknown to each other, two large type of pension sponsors were both searching for methods to de-risk their obligations. Both were dealing with the assistance of the same consultant, Mercer’s, which had a group in Montreal dealing with one of the clients and a team in its Toronto office dealing with the other.
After determining that the buy-in annuity was the best way to choose each pension fund, each fund approached numerous providers before settling on Sun Life Assurance, the leader. However the two funds C that have multiple plans – received exactly the same answer: it didn’t make sense financially for every fund to buy such insurance.
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And this is where the problem could have ended. But Sun Life took a further step: it contacted Mercers and asserted when the two funds wanted a combined annuity buy-in transaction then that will make sense financially. The premiums would be lower than otherwise for funds, who based on both Mercers and Sun Life, is still not aware of the name of the other as both have chosen not to disclose their identity. Actually the combined premiums C the 2 are paying Sun Life $530 million C could be $20 million less than otherwise.
“We were happy to pass those savings on,” said Brent Simmons, senior md of defined benefit solutions at Sun Life Financial and something from the participants that has spent in regards to a year focusing on the proposal, the largest in Canadian history, that was announced Tuesday.
Sun Life imposed one condition: both deals had to close simultaneously.
The two funds bought an annuity that covers investment, longevity and inflation risk for any certain subset of their retirees. In other words, Sun Life has had on the responsibility of meeting the obligations the 2 funds make. Which obligation covers longevity risk (meaning the retirees live more than expected) and investment risk (meaning that Sun Life will manage the assets in a way that the obligations will be met.)
“The risk has been transferred to Sun Life’s balance sheet in the balance sheet of the two sponsors,” added Simmons.
One reason a combined annuity buy-in made sense was that both pensions promised benefits that were inflation-linked C though in different ways: in a single fund promised benefits were higher when inflation was low; within the other the advantages were higher when inflation was higher.
“They were different but complementary,” noted Simmons who indicated that in 2015 about $2.5 million in premiums were collected for the sale of group annuities. (In 2015, Mercer and Sun Life teamed up inside a $5 billion pension longevity insurance transaction for any number of Bell Canada retirees.)
Manuel Monteiro, the leader of Mercer’s Financial Strategy Group, asserted although some fund sponsors attempt to de-risk with the addition of more fixed income to the portfolio, other medication is saying “understand this risk off my balance sheet.” For the reason that situation the fund buys an annuity that will fully hedge the fund from investment risk and longevity risk.
Monteiro said the annuity market continues to be held back because pension plans commonly are not fully funded and “you need a lot of cash to buy an annuity.” Another reason is the fear of creating a mistake. “If rates of interest rise the premiums will become much cheaper,” he added.
bcritchley@nationalpost.com
