Back to the future: CWB addresses pension risk with annuity buy-in

Add the Canadian Wheat Board to the list of organizations finding alternative means to tackle the risks lurking in its underfunded defined benefit pension plan.
Last week, the CWB announced it had signed a $150-million inflation-linked annuity policy with the Sun Life Assurance Co. of Canada that transfers investment and longevity risk from the wheat board’s defined benefit pension plan to Sun Life Financial.

An “annuity buy-in” is a type of investment held in a pension fund that allows investment and longevity risk to be transferred to an insurance company, while preserving members’ pension benefits.

The agreement is unique in Canada because it involves pension income that grows with inflation as well as the annuity buy-in solution.

The $150-million transaction is the largest single-day purchase of inflation-linked annuities in Canada, and the largest single-day purchase of a next-generation annuity buy-in in Canada.

CWB was advised by Aon Hewitt, as well as lawyers from Dentons Canada LLP pensions and benefits group including partners Scott Sweatman, Mary Picard, and pension associate Colin Galinski. Sweatman points out the concept of using an annuity to offset risk in a defined benefit pension plan is not an entirely new idea.

“The notion of having an annuity as an investment goes back to where we started, really. Many years ago companies would have annuities as part of their investment plans,” he says.

In fact that practice goes back to the 1920s, but over time pension plan sponsors moved away from buying insured annuity products and towards other risks such as equities for higher returns. But over the years, market crashes and roller coaster returns have plan administrators eyeing insurance annuity products again as DB plans struggle.

DB pension plans commit to pay set pensions to future retirees and were created decades ago when workforces were young and interest rates were high. But as interest rates fell and workers stayed employed longer, liabilities grew while asset values fell.

And while it’s large, the CWB annuity deal is small compared to some purchased in the United States in the last year to achieve the same transference of risk away from the company and to an insurer. Last June, General Motors Co. announced it would reduce its pension obligations by $26 billion by shifting assets and liabilities to Prudential Financial of America. And last October, Verizon Communications moved 25 per cent of its pension obligations, or $7.5 billion, to Prudential.

Sweatman also points out the CWB deal is not an “annuity buy-out,” which transfers all the liability out of the existing pension plan. And while it’s predicted there will be more annuity buy-in transactions announced in Canada this year — of significantly larger size — he cautions there isn’t a one-size-fits-all strategy when it comes to annuity solutions.

“You have to look at whether the organization can afford it and what the risk tolerance is,” he says. “CWB looked at its pool of assets and conservative stock portfolio and it made sense.”

Sweatman says unlike others who have been predicting the demise of DB plans for years, he thinks they will be around for some time to come and is actually a fan.

“Another client wanted to get out of its defined benefit plan and the cost was very expensive to go to a defined contribution plan. I’m still a big fan of defined benefit plans and I don’t think they’re all going to die off,” he says.

Even though the CWB has essentially outsourced the risk management portion of its pension plan to Sun Life for employees, Sweatman says there should be no visible change to employees in how their plans are managed.

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