General Motors Canada has closed a deal for three insurance companies to take on $1.8-billion of its retiree pension obligations, the largest transaction of its kind in the country’s history.
The automaker bought annuities from the insurers to take care of the pension obligations, removing from GM’s books the risk of making the future payouts. Sun Life took on the largest cut, at $1.1-billion, with iA Financial Group’s share at about $600-million and Brookfield Annuity Co., part of Brookfield Asset Management , at about $100-million.
As the market chaos caused by COVID-19 subsides, more deals are likely, with the combination of high stock prices and rising interest rates making the price of buying out pensioners better than it’s been in some time.
The GM deal applies only to pensioners who retired prior to June 1 of last year, which represents the vast majority of current benefit recipients. They will begin getting cheques from the insurers, rather than GM, later this year. GM transferred about $1.4-billion in pension-plan assets to the insurers and paid the rest in cash, said Marco Dickner, Willis Towers Watson’s Canadian leader for retirement risk management. The consulting company represented GM in the deal.
Insurers and consultants say the transaction is a landmark, demonstrating Canada’s capacity for big pension-annuity deals. Companies and insurers announced several large transactions in 2019 and early 2020 that are dwarfed by GM, including the Co-operative Superannuation Society Pension Plan ($660-million); Iron Ore Company of Canada ($560-million); Rayonier Advanced Materials ($293-million) and Domtar Corp. ($461-million).
Willis Towers Watson says group annuity purchases – which includes pension-plan transactions – hit $5.2-billion in 2019 before dropping to $4.4-billion in 2020. (Last year’s figures include the GM transaction because of the timing of the payments between GM and the insurers.)
“We could see a spike up this year,” Mr. Dickner said. “Given all the improvement [in market conditions], it’s led us to believe that we could have another record year this year in terms of volume of transactions.”
Pension plans’ assets are robust thanks to all-time highs in the stock market. And a plan’s liabilities – the future benefits it must pay – are estimated by expressing all those future benefits in present-day dollars. When rates go higher, the liability gets smaller – and a pension-plan sponsor can pay less to transfer the risk. Willis Towers Watson believes 2020 offered the most favourable pricing of the last decade.
Two other consulting companies – Aon PLC and Mercer Canada Ltd. – said their estimates of defined benefit pension solvency in Canada jumped in the first quarter, largely due to rising interest rates. Mercer’s measure was at an all-time high for health, as well as the affordability of annuities for plan sponsors, says Ben Ukonga, a principal in Mercer’s financial strategy group. “The financial impact right now is much smaller than in the past.”
A GM spokesman did not respond to a request for comment. The Globe and Mail reported in December, 2018 that the primary pension at the carmaker’s Canadian operations erased a multibillion-dollar deficit from two years prior and hit fully funded status. GM agreed to fully fund the pension plan in its September, 2016 contract negotiations with its union.
Willis Towers Watson believes Sun Life led insurers with 42 per cent of the industry’s sales. iA Financial, Brookfield Annuity, and affiliates of Royal Bank of Canada and Bank of Montreal follow with low double-digit shares.
Sun Life got into the business around the time of the 2008 financial crisis and did about $250-million of annuities, said Brent Simmons, the company’s head of Defined Benefit Solutions. In 2020, it did $1.9-billion including the GM deal.
“Back in the early days, the only people that were buying annuities were companies that were completely winding up their pension plans and looking for a home for those retirees,” he said. Now, “the vast majority of the purchases are being done by ongoing pension plans that are just interested in better managing their risk … it’s very positive as pension funds think about better risk management and shrinking their exposure to potential bad news.”
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