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Annuity purchase for retirees: Is now the right time?
In recent years, annuity purchases for retirees have become a preferred approach for managing the maturity and controlling the risks of defined benefit pension plans. Many factors have recently shifted the landscape of annuity purchases in Quebec, which should prompt you to question—or re-question—the relevance of adopting such a strategy for managing the risks of your pension plan. Overview.
Quebec legislation now allows the purchase of annuities “with full buy-out”, which enables plan administrators and sponsors to protect the pensions of their retirees by transferring their pension obligation to an insurance company, without having to worry about the boomerang effect of seeing that obligation return to their balance sheet. British Columbia legislation has also recently allowed this, and a similar proposal has been submitted for Ontario and federal plans. Legislators clearly want to provide plan administrators and sponsors with tools to manage pension risks. It may be appropriate to review your risk management strategies accordingly.
The Canadian group annuity market has been growing steadily for several years. Annuity quotation prices recently observed on the market are increasingly competitive—even for annuities that were, up until recently, deemed difficult to insure, such as indexed annuities—due in particular to insurance companies’ access to preferred investments. Now might be the right time to see what the market has to offer.
For many, low interest rates were not conducive to the purchase of annuities, whose prices were artificially inflated. Given the current context, it may be wise to consider the impact of interest rate levels on the decision to purchase annuities or not.
Is it still viable for pension plans to maintain the full obligation related to their retired members in the plan? The weight of retirees is increasing due to their growing numbers, combined with higher life expectancy. This weakens the stability of the plan and increases cost level and volatility. A transfer to an insurance company may help secure the pension benefits of retirees. Furthermore, it is sometimes more expensive to retain retirees in the plan than to transfer the risks to an insurance company! Annuity purchases undoubtedly form part of risk management strategies to consider in order to:
- Comply with fiduciary duties
- Ensure the security of retirees’ benefits
- Foster the plan’s sustainability
Normandin Beaudry specialists have been supporting their clients in pension risk management for 25 years. We pioneered the annuity purchase strategy as a preferred tool for mitigating pension plan risks, in addition to working in collaboration with regulatory authorities to facilitate the use of this strategy. We will be pleased to share this expertise with you.
Please feel free to contact us for additional information.