The C$7.8bn worth of deals struck in Canada’s pension risk transfer (PRT) market in 2023 were spread across 190 sponsors, giving an average deal size of roughly C$40m. While larger deals are not unheard of, the market is concentrated among small and medium sized entities.
Canadian pension scheme sponsors are showing a consistent appetite for PRT deals. Data from actuarial consultants Ecklers shows the market hovered around the C$8bn mark for three years in a row and according to Mary Kate Archibald, Principal at Ecklers, 2024 could deliver even bigger numbers.
“What we’re hearing from the insurers is that 2024 has the potential to be another record-breaking year in Canada. There’s still a ton of activity going on, even though we’ve seen a couple of small interest rate decreases this year,” says Archibald.
“Before 2021 the Canadian PRT market saw C$4bn-C$5bn transacted each year for a few years. Prior to that, it was around C$2bn-C$3bn each year. The current deal flow represents a significant increase in the size of the market in percentage terms,” she adds.
The main catalyst for this change is, unsurprisingly, interest rates. In the decade up to the pandemic, rates moved between 0.25% and 1.75%, a level which Archibald says caused a problem for pension fund sponsors. Local regulations require schemes to show their funding level on a buyout basis and for ongoing funds if they are able to achieve this metric over a five-year period.
“Pension plan funded positions were suffering before the pandemic, interest rates were low, and the regulatory environment in Canada required pension plans to fund their solvency measure, which uses the cost of settling benefits through lump sums or annuities to assess the security of the benefit,” says Archibald.
Each of Canada’s ten provinces have their own pension regulatory frameworks but broadly speaking, the same dynamics were present across the whole market.
With rock bottom interest rates throughout the previous decade, a number of plan sponsors needed to get exemptions from regulators from meeting the funding requirements leading to discussions over the risks such schemes placed on their parent companies.
Canadian interest rates hit an all-time low of -0.10% in October of 2020, with the central bank moving to tighter monetary policy in March 2022. As of September 2024, they stand at 4.5% following two 0.25% cuts in June and July of this year.
“What happened in 2021, when interest rates significantly increased, is that a lot of these plans went from 80% funded to close to 100% and suddenly realised that a PRT transaction was no longer hypothetical,” said Archibald.
The result was a sharp uptick in the number of PRT deals in the Canadian market, starting in 2021 and continuing every year since.
Interest rates aren’t the only factor in the increased attractiveness of PRT transactions to Canadian pension scheme sponsors, according to Archibald. Another important factor she points to is the introduction of annuity discharge regulations in a number of Canadian provinces which essentially mean that a sponsor is relieved of obligations once a scheme has transferred to an insurer.
So far, several of Canada’s most economically important provinces including Ontario, British Columbia, Quebec and Nova Scotia have enacted annuity discharge regulation, and Archibald says that the removal of what she terms ‘boomerang risk’ via these sets of regulations provides sponsors with additional comfort to strike a deal with an insurer.
Archibald adds that another push factor for the PRT market was the Pension Protection Act receiving Royal Assent in 2023. This piece of legislation prioritises pension plans under the Company’s Credit Arrangers Act in the event of a business going insolvent.
“This can affect the cost of borrowing because there is now a super priority to the pension plan over other creditors, in particular when the plan is large compared to the company,” she says.
And while this act doesn’t come into force until 2027, Archibald says that a number of sponsors have recognised the potential risk it poses to their balance sheet and in turn are trying to reduce riskiness of their pension plan.
The final change to impact the Canadian pension market is an increase in the support offered by insurance guarantee scheme Assuris. Funded by contributions by insurers, and similar in intention to bank deposit insurance schemes which are present in many markets, Assuris provides – among other protections – funding for annuities in the event that a carrier goes bankrupt.
“In 2023 Assuris expanded its pension coverage limits from C$2000 to C$5000 of monthly pension, in addition to some other enhancements in coverage. That’s a significant change, and it provides better coverage for many more annuitants. While I don’t think that necessarily has changed the demand explicitly on its own, it has given sponsors more comfort that if they annuitise, their members are protected,” says Archibald.
Archibald expects the Canadian PRT market to continue seeing a healthy deal flow level and while there are no new defined benefit pension funds emerging in Canada, she says the existing pool of schemes will continue to look for buy-out solutions and the deal pipeline will remain strong for the next few years.
“PRT activity in the next few years has the potential to remain similar to the levels seen in the past few years,” she says. “While eventually, many of the plans that want to transact will have done so, and the activity may slow, it’s not going to happen next year, and we expect several years or more of high activity.”
