Canada’s First Mega Pension-Risk Transfer Deal

(March 6, 2014) — An unidentified Canadian company has purchased $500 million of annuities from an insurer, Towers Watson has confirmed, which is the largest pension risk transfer (PRT) deal ever in Canada.

The plan sponsor, one of Towers Watson’s clients, reportedly partnered with Quebec-based insurer Industrial Alliance on the deal, according to The Globe and Mail. When contacted by aiCIO for confirmation, however, Industrial Alliance said it “will not comment on that topic.”

Towers Watson said the deal departs from a traditional annuity purchase.

“This restructuring of pension risk was achieved through a combination of a third-party annuitization and a self-insurance solution,” Towers Watson said in a statement. “This approach optimized the use of company capital and provided added pension investment flexibility.”

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The consulting firm said the bulk annuity purchase would help sustain the company’s pension benefits.

“It also reduced the risk of trapped capital resulting from improving pension plan financials, yet at the same time provides plan members with the added comfort of knowing that their plan’s funding is maintained and preserved,” said Ian Markham, Canadian retirement risk management leader at Towers Watson.

The consultancy would not comment further on the details of the deal.

This agreement is the second major PRT deal announced in Canada in the past year. Last June, the Canadian Wheat Board (CWB) signed a $150 million annuity buy-in agreement with Sun Life Assurance.

“The deal is a ‘win-win’ for CWB and its plan members,” said Andrea Carlson, vice president of corporate finance and strategy at CWB, at the time of the deal. “Sun Life is now managing all of the market-related risks of our pension plan through an annuity buy-in, providing an indexed solution that others in the market told us couldn’t be done.”

Experts in pension risk management said increases in funding levels last year due to rising interest rates and strong equity markets have stimulated Canadian pensions’ interest in transferring risks to an insurer.

According to Mercer’s pension buyout index, these changes in 2013 allowed the cost of annuities in Canada to be the cheapest of anywhere in the index. The cost of insuring $167 million worth of retiree obligations in Canada was just 5% more than the equivalent accounting liabilities, compared to 8.5% in the US, 17% in Ireland, and 23% in the UK.

“Group annuity purchases have been done for eons,” said Fred Vettese, chief actuary at Morneau Shepell, a Canadian human resources and actuarial consulting firm. “We’re now seeing a trend of annuity of buy-ins where companies buy annuities from insurance companies but keep paying their pensioners. Both insurance companies and plan sponsors are seeking it out as a way to reduce risk.”

However, such deals are still small in the Great White North, he continued. “There hasn’t been much in Canada so far, but I foresee it growing in the future,” Vettese said.

According to Towers Watson data released in December 2013, fewer than 7% of plan sponsors have been taking or are planning to take de-risking options such as annuity purchases and lump sum payouts.

(March 6, 2014) — Martin Clarke, the executive director of financial risk at the UK’s lifeboat for bankrupt company pension funds, is to join the Government Actuary Office, aiCIO has learned.

Clarke will leave the Pension Protection Fund (PPF) later this year and become the Government Actuary for a five-year fixed term, the agency confirmed today.

A former member of aiCIO’s Power 100, Clarke has been with the PPF since its early days and has helped its assets grow from less than £1 billion to more than £13 billion in under a decade.

After the departure of PPF CIO Ian McKinlay in 2012, Clarke took over the general investment helm until the appointment of Barry Kenneth into the role last year.

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He has been instrumental in creating a three-pronged investment risk regime employed by the fund. He was also actively involved in bringing more than one liability-driven investment manager on board to diversify the fund’s risk.

PPF Chairman, Lady Barbara Judge, said: “Martin has made an enormous contribution to the success of the PPF during the last eight years, not least in spearheading an investment strategy that has seen our assets grow to more than £15 billion and put us on course for financial self-sufficiency in 2030.”

Clarke is a Cambridge-educated mathematician, actuary, and Harvard Business School alumnus. Before the PPF, he worked in retail financial services with the Co-operative Insurance Society.