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Morneau Shepell’s January 2021 Pension Risk Bulletin: Readiness paid off in a turbulent year

Morneau Shepell publishes a periodic Pension Risk Bulletin to provide updates and views on pension risk transfer and risk management to defined benefit (DB) pension plan sponsors in Canada. In the first 2021 issue of the Pension Risk Bulletin, we review the turbulent year that was 2020 for pension risk transfer activities and address trends that Morneau Shepell’s Pension Risk Transfer team is expecting for 2021 and beyond.

Key Highlights

  • In the face of the public health crisis caused by the COVID-19 pandemic, the Canadian group annuity market has proven to be strong and resilient in 2020 with an estimated volume of $4.5 billion, a figure not too far from 2019’s record-breaking year for Canada.
  • The third quarter saw a record-breaking transaction of $1.8 billion completed in a single day, of which approximately $1.1 billion was with a single insurer. 2020 has been a testament to how a single transaction can significantly affect the total volume in a given year.
  • March and April of 2020 displayed significant financial market volatility as well as a liquidity crunch affecting the bond market, particularly for corporate bonds. Market volatility was such that the Canadian Institute of Actuaries published an off-cycle solvency proxy on April 30, 2020.
  • Stakeholders were reminded of how volatile the funded status of a pension plan can be. At the end of the first quarter, equity valuations had tanked and risk-free interest rates were at record low levels, leading to a deterioration of pension plan’s solvency ratio. As the year progressed, the interventions of central banks and governments to boost local economies took effect, which led to an incredible turnaround for the equity markets and pension plan funded positions increasing back to levels that were close to what they were at the beginning of the year.
  • The widening of credit spreads during the peak of the crisis allowed insurers to find higher yielding fixed-income assets, which improved group annuity pricing for the transactions that went to market at that time or shortly thereafter.
  • Canada saw its third longevity insurance agreement completed at the beginning of 2020 for the Co-operative Superannuation Society (CSS) pension plan. The agreement allowed the CSS plan, a defined contribution type arrangement that provides optional guaranteed lifetime retirement income, to transfer longevity risk for $660 million of liabilities to Cooperators Life Insurance Company.
  • The appetite from insurers and the industry as a whole continues to grow for group annuities. A growing number of insurers are allocating an increasing amount of financial and human resources to pension risk transfers.
  • Data-driven longevity insurance products will eventually become more prevalent, particularly for plan sponsors or administrators seeking plan sustainability over the long term.

News & Views - February 2021 (PDF)