BCE Inc. this month announced it would transfer pension liabilities in a longevity insurance swap in what sources said was the first such move by a corporate defined benefit plan outside of the U.K. and could be a harbinger of similar moves among large DB plans in Canada.
The Verdun, Quebec-based telecommunications company on March 3 announced Sun Life Financial Inc. will insure C$5 billion ($4 billion) in pension liabilities for current retirees in the Bell Canada Pension Plan.
The Bell Canada deal “was a groundbreaking transaction,” said Gavin Benjamin, senior consulting actuary, Towers Watson Canada Inc., Toronto. “A lot of corporations with large pension obligations will be looking at this as part of an overall derisking trend in Canada.”
BCE has C$18.9 billion in pension assets, including the C$13.9 billion Bell Canada plan.
The agreement between BCE and Sun Life differs from pension buyouts and buy-ins in that BCE retains both administrative and investment responsibilities for the Bell Canada plan, and its liabilities are still included in BCE’s balance sheet. “There are two big risks for plan sponsors — investment risk and longevity risk,” said Manuel Monteiro, partner, retirement business, at Mercer (Canada) Ltd., Toronto. “Buyouts and buy-ins transfer both risks to an insurer; the BCE deal is only the longevity risk.” Mercer advised BCE on the longevity swap agreement.
Brent Simmons, senior managing director, defined benefit solutions, at Sun Life in Toronto, said a longevity swap allows retirees to deal directly with their former employers, rather than receiving a pension check from an insurance company. “Longevity insurance is something that happens behind the scenes,” Mr. Simmons said. “It still keeps the relationship with the employer and the pensioner because the company still administers the pension plan and handles investment responsibilities. The insurer stays in the background as an extra safety net in case retirees live longer (than expected). A pension fund is, in a way, a mini-insurance company that has to pay out more as people live longer. Insurers like us provide a helpful home for that risk.”
Neither Mr. Simmons nor Mr. Monteiro would go into specifics of the agreement, citing client confidentiality rules. Jason Laszlo, BCE spokesman, said company officials would not comment.
Longevity insurance is another way companies can derisk their pension plans without closing or freezing them, said Douglas Rienzo, partner, pensions and benefits group, at the law firm of Osler, Hoskin & Harcourt LLP, Toronto. “For large pension funds and for enterprises committed to staying in the DB world, whether because of collective bargaining agreements or competitive business reasons, they’re going to look at this,” Mr. Rienzo said. “They’re also going to look at pension buyouts and buy-ins. All are on the table.”
Messrs. Benjamin, Monteiro and Simmons agreed a longevity swap works hand-in-hand with liability-driven investment strategies. “In fact, having LDI in place actually helps” do a longevity swap, Mr. Monteiro said. “The one issue with LDI is that you really don’t know what the liabilities and projected payments will be. With (longevity swaps), that’s less of a concern and it’s easier to project benefits. That’s what we’ve often seen in the U.K.; most plan assets will already be in an LDI strategy, then they layer this type of risk control.”
Also, said Mr. Simmons, LDI is easier when liabilities become a schedule of premiums pension funds pay for the insurance. “We see this as allowing plan sponsors to do more in-depth LDI, even better LDI,” Mr. Simmons said. “They can match the investments to pay that premium, which is scheduled at time zero and then goes out to 40, 50, 60 years. Plan sponsors can sleep better at night knowing that they have a firmer handle on the liabilities.” Sun Life in January announced it agreed to acquire LDI manager Ryan Labs Asset Management, New York.
Longevity insurance is more of an option for DB plans with more than C$1 billion in assets or the same amount in liabilities because of its cost and complexity, sources said. In a buyout, however, the issue is more about whether the Canadian annuity market has the capacity to handle large plans or, given current fixed-income rates, if they are affordable.
“In Canada, the group annuity business has about C$2.5 billion in assets,” said Mr. Benjamin. “BCE alone had C$5 billion in obligations. It’s arguable whether they could settle through using annuities. That wouldn’t have been practical.”
Added Mr. Monteiro: “Companies might think now’s not the right time to transfer investment risk; given that interest rates are so low; they would prefer to wait until rates are higher. But they could still be scared of longevity risk, which would make such a swap attractive.”
Most annuitizations done by pension funds in Canada have been “where plans have been wound up,” said Osler Hoskin’s Mr. Rienzo. “I’m not aware of any big annuity purchase for a portion of a DB plan. Annuitization is an expensive proposition, especially in a low-interest-rate environment. The lower the rate, the more expensive the annuity.”
