Longevity insurance: a potential option for Canadian pension funds?LinkedIn
There, in black and white
NB Bulletin Vol 17 N. 9, September 2014
Without question, 2013 was a record year in Canada for group annuity purchases and many agree that 2014 is bound to set this record. Normandin Beaudry was very active for its clients in this market with insured annuity purchases accounting for about 20% of the total value of annuities purchased in 2013.
The purchase of annuities is a popular risk mitigation strategy employed by pension plan administrators. There are two options when it comes to annuity purchases:
The risks hedged by these types of annuity purchases include financial risks such as interest rate risk, equity market risk and inflation risk, as well as a demographic risk, the longevity risk. Financial risks have generated a great deal of interest in recent years while demographic risk has slipped under the radar of pension plan administrators.
The publication of a new Canadian mortality table last February certainly made pension plan administrators aware of the improvement in life expectancy, and thus the increasing longevity risk that their pension plan will be facing. Because the Canadian market may not be able to absorb the increasing demand for annuity purchase contracts from pension plan administrators, new longevity risk mitigation strategies can be expected to hit the Canadian market and to attract more and more interest.
Longevity insurance1 is an example of this type of strategy. Currently popular in the United Kingdom, longevity insurance is making a late entry into the Canadian market. The Office of the Superintendent of Financial Institutions (OSFI), the agency responsible for supervising and regulating private pension plans subject to federal oversight, published a ”Policy advisory on longevity insurance and longevity swaps” on June 9, 2014. This was a first for a Canadian governmental authority.
How do these risk management vehicles work?
Longevity insurance provides a pension plan protection against a possible improvement in longevity and life expectancy. A contract is issued between the pension plan and a counterparty, typically a large insurer. This contract will determine the fixed payments to be made to the insurer from the pension fund. In return, the insurer provides the pension fund with regular floating payments based on either the pension plan's actual mortality experience or an agreed upon mortality index, such as the Canadian mortality experience.
The purchase of annuities continues to be the preferred solution for Canadian pension funds and, if the size of the longevity insurance contracts issued in the United Kingdom is any indication, the longevity insurance market may be gaining in popularity over the long term only. Normandin Beaudry will continue to monitor the Canadian market and will keep you informed as to the interest in implementing a longevity insurance contract for your pension plans.
1 It should be noted that longevity swaps are another example of a risk mitigation strategy. To date, no longevity swap contracts are available in Canada.
Please feel free to contact us for additional information.
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