Aggregate deal value in the Canadian pension risk transfer (PRT) market set a new record in 2024, according to a new report from consultants WTW. CAD$11bn worth of deals transacted last year, comfortably beating the previous record of CAD$7.8bn, which was set in both 2022 and 2023.
A couple of notable deals contributed significantly to the new record. In October 2024, IBM Canada Ltd. completed a CAD $1.5bn buy-out transaction for 6,000 plan members with Blumont Annuity and RBC Insurance, and in February last year, the Ford of Canada Retirement Pension Plan Number 3 announced a group annuity buy-out transaction of CAD $923 million for over 2,700 members with RBC Insurance, Sun Life and Desjardins Group.
While large deals such as these can distort the overall picture in terms of the growth of the market, activity also set a new record.
“The four largest transactions completed by WTW accounted for CAD $4.2bn of the market, but what is also of note is the number of transactions in the market overall increased to around 130, which is again a new record for the Canadian market,” said Marco Dickner, Canadian Retirement Risk Management Leader at WTW.
Something notable about the IBM and Ford deals is that more than one insurer was involved in each transaction, a feature rarely, if ever, seen in the UK or US markets. While it might seem counterintuitive, slicing up the pie this way results in a better price for the pension scheme because if one insurer were to take on the whole deal, it may need to price it higher due to capacity constraints, regulatory capital management or risk diversification reasons. For the plan sponsor, however, the process is still a smooth one.
“There is usually a lead insurer which takes the first slice of the deal. Then the others are secondary insurers. Firms like ours figure out the options for the plan sponsor and ask the insurers to price on those options but we want a uniform treatment for retirees, so the insurers pay each other in the background. There may be more than one insurer, but the scheme itself deals with one. The second insurers are essentially doing a buy-in of the main insurer,” said Dickner.
Concentration risk might look, to an outsider, as much more of a potential issue in Canada. WTW’s report says that just six insurers – Sun Life, Blumont Annuity, IA Financial Group, BMO Insurance, RBC Insurance and Desjardins Insurance – account for 99% of the entire market.
Compare that with the US, which has approximately 20 insurers, and the UK, which is now up to 11 insurers with the recent entries of Blumont Annuity and Utmost in the first quarter of this year, and you might be forgiven for being uncomfortable with the risk.
But that’s what reinsurers are there for, right? Well, not quite. Canadian life insurers are generally well-capitalised and highly regulated, with strong risk management practices, so they may feel comfortable holding more longevity and investment risk on their own balance sheets rather than paying for reinsurance. The capital framework under Canada’s Life Insurance Capital Adequacy Test (LICAT) is already designed to ensure insurers hold sufficient reserves. Reinsuring some of the risk might not provide a significant enough capital relief benefit to justify the cost, and, to date, reinsurers have therefore played a significantly smaller role in the Canadian PRT market than they do in the UK or US, for example.
That could be about to change, however.
“We’re having more conversations with reinsurers now who are looking to enter this market. By doing so, this will naturally increase capacity as the insurers themselves will be de-risking to a greater extent,” said Dickner.
Pricing might need to adjust going forward, however. As with other countries, actuaries have arguably never been busier in Canada in the aftermath of the Covid-19 pandemic. A report published a year ago by the Canadian Institute of Actuaries (CIA), based on research carried out by Ad Res Advanced Reinsurance Services GmbH in collaboration with Koblenz University of Applied Sciences between 2021 and 2023, suggests that mortality improvement among Canadians was higher than previously thought. Longevity analytics provider Club Vita’s Michael Reid, Head of Pensions, North America, said in an article that: “Most plan sponsors will likely be most concerned with the impact of the new MI scales on plan liabilities. For plan sponsors using CPM-B, pensioner liabilities would be expected to increase between 1.5% and 3.5% for men and 1.5% and 2.5% for females.”
Longer living equals more cost for the insurer, so the potential increase in involvement from the reinsurance market could provide support here. But other tailwinds exist to support the growth.
In April 2023, Canada enacted the Pension Protection Act (PPA), which has significant implications for the bulk purchase annuity market in the country. The PPA’s introduction of super-priority status for pension deficits in insolvency proceedings has heightened the focus on pension plan funding and risk management. This legislative change, coupled with favourable annuity pricing due to higher interest rates, has led many plan sponsors to consider annuity purchases as a strategic move to mitigate pension-related risks.
From a certain point of view, the Canadian PRT market is already the world’s most active. Canada’s 130 or so transactions last year pales in comparison to the US market, which saw almost 800 deals in 2024, and the UK’s, which delivered a smidge under 300 buy-in deals alone, But, adjusted for population, the Canadian market sees much more activity.
And all of these recent developments, along with the already strong funding position of many Canadian private defined benefit pension plans, all point towards a ‘new normal’ of eleven-figure aggregate deal value in the coming years.
“Only 15% of the available de-risking market in Canada has transacted so far,” said Dickner.
“So, 85% has not transacted. Canadian defined benefit pension plans are generally well funded – more than 80% of them are fully funded – so the pipeline is strong. While the next few years might not set a new record each year, on average over the next three years we would expect total dollars to stay above the CAD$ 10bn mark.”
