Sales ($ Billion)
1. For 2008 to 2012, the breakdown of sales between buy-in and buy-out for terminated plans and buy-out for ongoing plans is not available. Excludes longevity insurance agreements.
2. Source of data: LIMRA, Beneva, BMO Financial Group, Brookfield Annuity, The Canada Life Assurance Company, Co-operators Life Insurance Company, Desjardins Financial Security, Industrial Alliance, RBC Insurance and Sun Life Financial.
The Canadian Institute of Actuaries (“CIA”) annuity purchase discount rate guidance (“CIA guidance”) supports actuaries in selecting actuarial valuation assumptions, without having to request annuity quotes from insurers, by providing market pricing for blocks of business of three different durations at a given date.
The most recently published CIA guidance indicates annuity pricing at unadjusted long Government of Canada (GoC) marketable bond yields (CANSIM V39062) plus a spread of 120 bps (using the CPM2014Proj mortality table) for non-indexed pensions with a medium duration, resulting in a discount rate of 3.12% as at September 29, 2021 (up from 2.50% as at December 31, 2020).
The 62 bps increase in the CIA guidance since the beginning of the year can be attributable to the increase in GoC bond yields (82 bps) partially offset by the 20 bps decrease in the CIA guidance spread for non-indexed pensions with a medium duration.
3. Details regarding the most recent CIA guidance can be found at www.cia-ica.ca/publications/guidance.
The estimated sales of ~$3.0 billion of group annuities placed during the third quarter of 2021 represent the largest quarter in the history of Canadian group annuity purchases. As anticipated in our previous edition of the market pulse, while the insurers have been increasing their risk capacity to keep up with increasing demand, the participation rates from insurers on a given transaction has decreased on average as calendar year 2021 progressed, mainly due to staffing capacity.
We expect the market to continue to grow given the well-funded status of most Canadian pension plans.
We expect the market to continue to grow in the near future given the well-funded status of most Canadian pension plans. Below, we list a few tips on how to achieve the best outcome in a market with high demand but variable supply:
Transact when others are not – There is a tenacious belief that transacting in the fourth quarter helps plan sponsors obtain a lower price as insurers compete to meet their annual quotas. This may not be the case in 2021. The second half of the year is becoming busier every year, limiting insurers’ resources to accommodate all transactions coming to market. Also, not all insurers have a fiscal year coincident with the calendar year (e.g., some insurers set their counters to zero as of November 1st). Most importantly, we have noticed that plan sponsors who transact earlier in the year benefit from higher participation rates, which optimizes the process. While not guaranteeing a lower price, having more insurers participating for a given transaction provides greater flexibility to elect a preferred insurer from a fiduciary perspective, and increases the likelihood of a better price. Lastly, early transactors have an additional option: if not all triggers are met, they can decline the bid and come back to market later in the year, usually with an accelerated process.
Buy-in as a short-term tactical solution – Group annuity purchase transactions are dependent on multiple factors, many of which cannot be controlled by the plan sponsor, thereby making it challenging to transact on a specific date. In these situations, a buy-in policy can become an efficient short-term tactical solution. A plan sponsor can take advantage of favourable market conditions and annuity pricing early by transacting with a buy-in policy, with the option to convert to a buy-out, at no cost, once all conditions are met. Under such an arrangement, the plan sponsor transfers all financial risks to the insurer on the transaction date, and only retain administrative tasks until conversion to buy-out. Furthermore, a buy-in policy does not require regulatory approval or any specific member communication, and does not trigger one-time financial impacts such as special contributions or settlement accounting.
Execution readiness – In a market with increasing demand, plan sponsors who can demonstrate that they are ready to transact will be able to capitalize on timing opportunities, and also attract the attention of insurers. Execution readiness includes providing clean and complete data, analyzing the mortality profile of the group to purchase, ensuring internal governance readiness, having clear transaction triggers and being responsive throughout the process.
Yield (%)
| Title | File Type | File Size |
|---|---|---|
| Group Annuity Market Pulse – Third Quarter 2021 | .2 MB |
