Why annuities are still cheap

Why annuities are still cheap

October 2018

Our analysis shows that annuities provide better yield than a typical passive bond portfolio – and free risk protection

Authors: Brent Simmons and Mathieu Tessier

Download article

In today's economic environment, are annuities still cheap?

In 2012, we wrote an article that compared the yield on annuities and on a typical passive bond portfolio. We determined that annuities are not only cheap – they are actually super bonds that provide better yield and free risk protection.

The economy today is in a different place than it was back then and pension plans are hitting record funding levels. Does our analysis hold up in 2018? Are annuities still cheap?

Our latest article takes a look back at our 2012 analysis to see if it still holds true today – and whether annuities still deserve to be called a super bond. Our conclusion? Even though the world has changed a lot (think self driving cars and ride-sharing apps), not much has changed when it comes to the affordability of annuities: 

  • Over the last 3.5 years, annuities have provided an additional average yield of 17 basis points per year over a typical passive bond portfolio.
  • Annuities also provide longevity and investment risk protection for free, while reducing expenses and providing benefit security for plan members.

That's why we have witnessed an increasing number of companies buying annuities – the market nearly quadrupled from $1 billion in 2012 to a record $3.7 billion in 20171. Innovative deals are driving the market in the last few years, including ones involving inflation-linked promises, active members and jumbo sizes.

"We are noticing that many companies are becoming much more strategic when it comes to buying annuities, with many either using a custom liability driven investment portfolio to transition to annuities or including annuities as part of their asset liability strategy," said Brent Simmons, Senior Managing Director & Head, Defined Benefit Solutions, Sun Life Financial. "We recommend that plan sponsors talk to their consultants and get an illustrative quote from insurers to help them plan ahead and be ready for when the market is just right for them."

Annuities are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies.

1LIMRA Secure Retirement Institute (February 14 2018)