Myth #1. My plan is too small or too large to purchase a group annuity

Good news! The 2024 Canadian pension risk transfer (PRT) market supported transactions from as small as $2M to over $1.4B. No matter your plan size, you can transact with the right communication and preparation.

Consulting firms help guide plan sponsors through group annuity transactions involving as little as a handful of annuitants. For large to jumbo transactions, tranching (i.e., splitting the transaction into smaller pieces) becomes more important.

Consultants offer valuable pension expertise with specialized annuity desks. They'll guide you through your de-risking journey and help build a robust governance framework. Their expertise can help ensure a successful outcome by understanding insurer preferences and timing for various transaction sizes. We recommend engaging them early and doing the same with insurers!

Myth #2. I can only include retired members in a group annuity

While retired members are most common in PRT transactions, you can also include deferred and even active members. Deferred member liabilities can often account for up to 25% of the group, sometimes more. We've developed innovative solutions for plans with a larger proportion of deferred members. For active members, if benefits are frozen, we can usually treat them as deferred members. If they're still accruing benefits, we'll work with you to align responsibilities for each risk. The 2017 Husky Energy transaction was the first of its kind to include active participants.  

Myth #3. The yield on a group annuity is too low to consider the solution as an investment opportunity 

Annuity yields have improved significantly in recent years. Sun Life estimates, based on the Canadian Institute of Actuaries annuity proxy, a 4.1% improvement in annuity prices relative to corporate bonds since January 2020.

As of March 31, 2025, the yield on annuities is above that of duration-equivalent passive corporate bond portfolios, even before adjusting for risk and expenses. Remember, group annuities transfer investment and longevity risk to insurers. They also include future investment expenses and administration expenses in annuity buy-outs. Corporate bond portfolios are still exposed to these risks and expenses. To adjust for these factors, we reduce the yield on the corporate bond portfolio by around 1.00%.

¹Using the March 31, 2025 medium duration annuity proxy spread, published by the CIA, and CANSIM V39062 yields at March 31, 2025.
²Based on a blend of the FTSE Canada All Corporate Bond Index and the FTSE Canada Long Term Corporate Bond Index at March 31, 2025 to achieve the same duration as the membership group used to determine the CIA medium duration proxy.
³Sun Life estimates as of March 31, 2025.

Myth #4. There is no market for group annuity transactions with inflation-linked liabilities 

The inflation-linked annuity market continues to see tremendous growth. After at least $925M in transactions in 2023, the inflation-linked annuity market surpassed $3B in transactions in 2024. This includes a $1.2B inflation-linked transaction, the largest Canadian PRT transaction done by a single insurer. We were honoured to be part of this ground-breaking transaction.

Plan sponsors are seeing more affordable options to transfer inflation-linked liabilities, especially for small and medium transactions. Despite the end of real return bond (RRB) issuance by the Government of Canada a few years ago, strong momentum continues in the inflation-linked annuity market while insurers can still source RRBs in the secondary market .