pension de-risking: annuities
TRANSCRIPT
Pension De-Risking – Annuities
A presentation to CPBI members
by Marco Dickner and Dylan Moser
September 19, 2013
Questions to Address in this Presentation
Annuities have been
around for some
time now. What is
new about them? Annuities
as a De-
Risking
Tool
Why purchase
annuities when
rates are so low?
How is the annuities market
expected to evolve in the
future?
2
1 2
3
1 Recent Developments
3
Liabilities Leverage
4
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Favourable Environment
80’s and 90’s
Unfavourable Environment
2000’s
Decreasing interest rates
Volatile equity returns
IFRS eliminated risk premium
Continuing increases in life expectancy
High interest rates
Favourable equity returns
Accounting rules biased towards risky
investments
Low retiree to active ratio
Actives
Inactives
Actives
Inactives
According to Towers Watson’s 2012 Pension Risk Survey, for 53%
of Canadian DB plan sponsors, reducing risk over the next year is
a top priority, up from 36% in 2011.
1 Recent Developments
4
Evolution of Long Term Risk Management Strategies
Risk
Management
Strategy
Long-Term Pension Plan Risks
Liability Risks Asset Risks
Demographic Regulatory Operational Longevity Inflation Interest
Rate Equity Credit Currency
Plan Design
Benefit Strategy Investment Strategy Liability Transfer/Exit Strategy
De
-Ris
kin
g E
vo
lutio
n
Risk Management Levers
Plan termination only
If DC implemented
5
1 Recent Developments
Traditional
Investment
Policy
LDI
Lump Sum
Annuity
Purchase
Longevity
Reinsurance
Annuity Purchase Strategies
6
Constitute the bulk of historical purchases
Growing segment of annuity purchases
Traditional:
Buy-Out Annuity
Emerging:
Buy-In Annuity
Pension Plan
Pension Plan
$
Insurer
$
$
$
$
(one-time premium)
(monthly pension
payments)
Insurer
$
$
$
$
(monthly pension
payments)
$ $
$
$
$
(monthly pension
payments)
(one-time premium)
1 Recent Developments
7
Type of Plan
Plan Termination
Buy-Out Buy-In
Ongoing Plan
Buy-Out
Full legislative settlement Most Regulators have the view
the annuitants remain plan
members.
Constitute bulk of historical purchases New annuity purchase trend
Annuities used as an alternative asset class
1 Recent Developments
Funding Considerations – Ongoing Plans
Purchasing of traditional buy-out annuities is likely to trigger the
acceleration of deficit funding in most jurisdictions
8
Acceleration of funding
in most jurisdictions
Buy-Out
Buy-In
Yes
No
No acceleration of deficit funding when purchasing buy-in annuities
1 Recent Developments
Accounting Treatment under IAS 19 – Ongoing Plans
9
Buy-Out Buy-In
Balance Sheet Impact
• One-time impact is the difference between the annuity purchase
price and the liability on the balance sheet (“DBO”)
• Purchase price for non-indexed pension is typically between 5%
and 15% higher when compared to the DBO
P&L Impact (One Time) • Likely a settlement • Most likely not a settlement
1 Recent Developments
2 Business Case for Annuities
10
Interest Rates are Low and Plans are Underfunded –
Why Purchase Annuities Now?
11
Costs of borrowing are at
historical lows
Borrow to fund and
accelerate de-risking
Swap long bonds
for annuities
Systematic
de-risking
Conditional
de-risking
Postponed
de-risking
3. Rationale 2. Tactic
MO
DE
RA
TE
F
UL
L
SL
OW
Sp
ee
d o
f D
e-R
isk
ing
1. Speed
Independent of level of interest
rates and mortality risk
transferred
Dollar cost averaging to avoid
market timing decisions
Purchases occur gradually as
plan’s financials improve
Delay de-risking
decision making process
Business
Case
2 Business Case
Chosen Strategy Depends on Plan Characteristics
12
Case 1
Immediate Plan Wind-up
Case 2
Upcoming Plan Wind-up
Case 3
Closed Plan
Case 4
Open Plan
Immediate full annuity purchase is mandatory
for retirees.
Annuity purchase can be used as an alternative
asset class.
Annuity purchase can be used to accelerate
liability exposure reduction.
May do a buy-in, or annuity purchases in
tranches over wind-up horizon, or in full upon
wind-up.
For Cases 1, 2 and 3, the question is not whether to purchase annuities.
The question becomes when and how to purchase annuities.
Case 5
Divestitures
Annuity purchase can be used to right size the
retiree liabilities.
May be an appropriate time to recognize the
accounting impact.
2 Business Case
3 Current and Future Market Conditions
13
Recent Experience in Canada, the US and the UK
14
Exchange rates: 1.6 USD/GBP, 1 USD/CAD
Sources: LIMRA, Lane Clark & Peacock LLP & Sun Life Financial
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
0
5
10
15
20
25
30
35
40
2005 2006 2007 2008 2009 2010 2011 2012
$ U
S B
illio
n
UK Buy-Out UK Buy-In UK Longevity Swap CAN US
3 Current and Future Market
Towers Watson Annuity Purchase Index –
Monitoring the Canadian Market
15
For 2011 and 2012, the breakdown of sales between buy-in, buy-out for terminated plans and buy-out for ongoing plans is not available.
Source of data: LIMRA, BMO Financial Group, The Canada Life Assurance Company, Co-operators Life Insurance Company, Desjardins Financial
Security, Industrial Alliance, Manulife Financial, The Standard Life Insurance Company of Canada and Sun Life Financial.
3 Current and Future Market
1,362
1,054
759
0
200
400
600
800
1,000
1,200
1,400
1,600
2011 2012 2013 up to June 30
Sales ($ Million)
Buy-Out (Terminated) Buy-Out (Ongoing) Buy-In (Ongoing)
572
27
160
Recent Developments in the Canadian Market
Upcoming changes to the CIA Group Annuity Purchase Discount Rate
Guidance
For non-indexed annuities, the duration of the obligations being purchased
is likely to be factored-in for future discount rate recommendations
For CPI-indexed annuities, changes to guidance is expected to result in
substantially higher liabilities than current guidance
The CIA released its Draft Report on Canadian Pensioners Mortality in
July 2013
Impact on annuity purchase pricing is expected to be limited
Canadian Wheat Board announced the purchase of $150M of buy-in
indexed annuities in a single transaction
Deal included transfer of assets in kind
16
3 Current and Future Market
Development Expected to Occur in the Near Future
Jumbo Transaction ($1B+)
Following the GM and Verizon transactions in the US, several Canadian
plan sponsors are exploring similar options
Annuity purchase as an investment option for DC plans
Available in the US
To help plan sponsors stay abreast of annuity purchase development
and trends, Towers Watson publishes each quarter a Group Annuity
Market Pulse bulletin
17
3 Current and Future Market
