Sun Life’s Defined Benefit Solutions (DBS) hosted Focus 2022 in late March – a webinar centered on helping defined benefit plan sponsors manage pension risk. We focused on two main areas – pension de-risking market trends and insights, and Rio Tinto’s de-risking journey.
We’ve heard from attendees that these sessions were very valuable, so I wanted to share my top five takeaways in case you weren’t able to attend:
1. Plan sponsors have two main choices to reduce risk and they’re interested in both
Plan sponsors have two options for reducing their pension risk – transfer and eliminate or retain and reduce. Transferring and eliminating risk is generally done by purchasing annuities. Retaining and reducing risk involves better matching assets and liabilities so they move in tandem and don’t materially impact the pension plan’s funded position.
When deciding between the two options, it’s helpful to think of annuities as a type of bond. Plan sponsors and consultants can compare the characteristics of an annuity to other investments to help determine which best suits their plan.
We were curious to know which of these two strategies best aligned to plan sponsors’ primary long-term risk strategy. During a live polling, the majority of DB plan sponsors told us they’re focused on a combination of the two. This is consistent with our observation that most annuities are purchased for on-going pension plans.
2. The group annuity market continues to reach new heights
Dhvani Desai (Director, Client Relationships, DB Solutions) shared fascinating insights about the group annuity market’s record-breaking growth.
Over the last four years, the Canadian group annuity market has doubled in size, reaching $7.7 billion. What’s interesting about this growth is the increase in transaction size. Since 2017, the number of big deals has tripled – last year there were 22 deals over $100 million. This shows that the market has evolved to handle larger scale transactions. Now, more plan sponsors can bring their entire plan to market, instead of doing smaller deals over the span of a few years.
Dhvani also shared that 25,000 Canadians had annuities purchased for them by plan sponsors in 2021. Over 70 plan sponsors made the decision to transfer DB pension risk and 15 were repeat buyers, indicating that annuities are a valued solution.
3. Pension plan sponsors’ challenges are evolving, so investment managers are getting creative
In the last two years, pension plan sponsors have faced a number of new challenges, including unexpectedly high inflation, and increased geopolitical risks. To help combat these challenges, investment managers are getting creative including offering multi-asset solutions, which incorporate more than just traditional fixed income.
During the session, Ashwin Gopwani (Managing Director, Client Solutions, SLC Management) highlighted a few examples of innovative options that investment managers and plan sponsors have at their disposal, such as:
- Inflation overlays: By using leverage, inflation overlays can add a layer of inflation protection on top of an existing fixed income portfolio.
- Real assets: Illiquid real assets can provide as high of an expected return as traditional equities, while providing a steady stream of income. They also tend to be more resilient during times of high inflation, since when bridge tolls and rents increase, the asset owner benefits.
With funded status volatility firmly on the mind of many plan sponsors today, Ashwin mentioned that it’s a great time for plan sponsors to reconsider their pension plan investment strategy.
4. Collaboration is key
To ensure a smooth and successful transaction, collaboration and planning between the plan sponsor, consultant and insurer is key. To help showcase how a deal can come to life, we invited the key stakeholders who worked on the de-risking journey for Rio Tinto’s Iron Ore Company (IOC) in Canada for a panel discussion.
Representing the plan sponsor was Jérôme Couture (Principal, Pension Investments & Actuarial, Rio Tinto). Jérôme emphasized the importance of clear communication between the plan sponsor and consultants and what it was like working with LifeWorks on IOC’s deal.
Jérôme said it’s important to, “have the right partners, and the right advisor helping you. They are the ones that know the insurer and what they’re looking for and will guide plan sponsors in the right direction”.
Bringing large deals to market takes a lot of work and it's important to bring trusted partners along for the journey.
LifeWorks’ partnership helped Rio Tinto navigate the Canadian de-risking market to ensure they brought the best deal forward. Consultants know what insurers are looking for, which helps attract the right buyer and improve marketability to get plan sponsors the best price.
5. Preparation pays off
During the panel discussion, Véronique Lauzière (Associate Partner, Investment and Risk & Innovation, LifeWorks) discussed the importance of data preparation and portfolio readiness. According to Véronique, coming to market well-prepared with these two items sends a strong signal and attracts attention from potential buyers. This preparedness shows insurers that plan sponsors are serious and ready to take the next steps.
The data preparation phase takes time and effort, but it pays off. Prioritizing portfolio readiness can help reduce margins to secure a better price. A survival audit to verify member’s ages, and ensure you aren’t insuring deceased people, is a great first step. Although mortality data isn’t always required before a deal, preparing clear and accurate information upfront helps to set expectations and negotiate premiums.
Preparing clear and accurate information upfront helps to set expectations and negotiate premiums.
Eric Soehner (Managing Director, Structuring, DB Solutions) also made a good point about how data preparation is beneficial for plan sponsors. Missing or unclear information affects pricing and leads to higher premiums. Although there is a price adjustment period six months after the transaction, providing accurate data upfront helps avoid surprises.
These five highlights are just a taste of the interesting and informative discussions from Focus 2022. Thank you to DBS team members Dhvani, Ashwin, Mathieu and Eric as well our expert guest speakers, Véronique and Jérôme for sharing your experience and insights.
If you’re interested to learn more about de-risking, you can watch the event recording.