Sun Life Assurance Co. of Canada announced on Tuesday that it has signed a $150-million inflation-linked annuity policy with the Canadian Wheat Board (CWB), which transfers the investment and longevity risk from CWB’s defined benefit pension plan to the insurer.
The deal involves an “annuity buy-in” – a policy that is similar to a traditional annuity, however instead of issuing individual certificates to the covered retirees and paying pensions to them individually, it involves a single annuity contract that is issued to the pension fund. The pensions are then paid to retirees by the plan fund; not by the insurer.
The strategy effectively limits the pension plan’s exposure to risks related to the retiree liabilities covered by the policy, including market and longevity risks, without any impact on plan members’ pensions.
The deal is the first of its kind in the Canadian market, according to Sun Life, a wholly-owned subsidiary of Sun Life Financial Inc. (TSX:SLF). The strategy has been used by a growing number of pension sponsors in other jurisdictions in recent years, as a way of managing risk.
“We’re extremely pleased to partner with Canadian Wheat Board to provide an annuity solution that is the first of its kind in Canada,” said Brent Simmons, senior managing director of defined benefit solutions with Sun Life Financial. “It is a game-changing transaction for our industry, and highlights our ability to provide competitive pricing for inflation-linked annuities through superior investment management.”
Last year, the Office of the Superintendent of Financial Institutions (OSFI) issued a policy advisory on annuity buy-in products, amid growing interest in the structures. The regulator concluded that it would have no objections in principle to a federally regulated pension plan investing in this type of annuity, provided that the investment is permissible under the plan terms.
Andrea Carlson, vice president of corporate finance and strategy with CWB, called the deal a ‘win-win’ for CWB and its plan members.
“Sun Life is now managing all of the market-related risks of our pension plan through an annuity buy-in, providing an indexed solution that others in the market told us couldn’t be done,” she said.