Morneau Shepell’s Pension Risk Bulletin looks at benefit security
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. Given the significant volatility in financial markets this year, the September 2020 edition of the Pension Risk Bulletin titled “The benefit security conundrum” studies de-risking and risk transfer solutions from different angles and considers what can be done to maximize benefit security.
- The “guarantee” that members will receive their full pension comes from the assets held in trust and the sponsor’s ability to make special contributions when required. Therefore, a participant’s benefit security in a DB pension plan is only as strong as the plan’s funded status and the plan sponsor’s ability to make up any contribution shortfall.
- Canadian life insurance companies offering group annuities have to hold sufficient reserves to cover all contracted future benefit payments and to put capital aside in case of adverse deviations from their assumptions for calculating those reserves. In other words, insurers are required by the Office of the Superintendent of Financial Institutions (OSFI) to be fully solvent at all times and to maintain a buffer. Additionally, most insurers obtain independent opinions from credit rating agencies and all have ratings of A- or above.
- Every life insurance company in Canada must become a member of Assuris, an independent not-for-profit organization aimed at protecting policyholders if their life insurance company fails. Assuris will work with an insolvent insurer to restructure the impacted books of business and will provide a minimum benefit protection for annuity policyholders that is the greater of 85% of the monthly income or $2,000. The vast majority of policyholders affected by past insolvencies did not suffer any reduction in benefits.
- A group annuity contract can strengthen participants’ benefit security, as the insurer’s financial strength along with Assuris coverage provide significant protection against risks such as market risk and longevity risk.
- Studying de-risking or risk transfer opportunities from different angles and communicating the decisions effectively to all stakeholders is of paramount importance to ensure everyone understands their impact, especially with regard to the participants’ benefit security.
- For plan sponsors and plan fiduciaries considering risk transfer opportunities:
- Keep the long-term objectives of the plan in mind as you structure the transaction;
- Define proactively the benefit security outcome you want to achieve; and
- Broaden your criteria for insurer selection beyond the premium paid.