The BCG Pension Insider

October 2021 – Volume 120, Edition 1

Q&A with Canada Life Re

COVID-19 Insights and Considerations for Pension De-risking

Canada Life Re

The Canada Life Assurance Company

Headquarters Winnipeg, Manitoba
Year Founded 1847
Assets Under Administration $500 billion*
Shareholders’ Equity $20 billion*

* As of December 31, 2020

Michael Mulcahy, FSA, MAAA

Michael MulcahyHead of U.S. Life Reinsurance,
Canada Life Re (“CLRe”)
President of CLRe’s U.S. Subsidiary,
Canada Life Reinsurance Company (“CLRE”)

Mike is responsible for all aspects of the operations of CLRE including pricing, marketing, and financial reporting, as well as the development of client solutions in the United States.

Mike Mulcahy can be contacted at 215-542-4318 or

BCG: Tell us a little bit about Canada Life Re and your background in longevity reinsurance

Mulcahy: Canada Life Re is the 8th largest global reinsurer by premium volume and a part of The Canada Life Assurance Company, founded in 1847. Canada Life Re entered the longevity reinsurance market in the early 2000’s and has been a very active player since, completing transactions covering $50 billion of liabilities in the last 5 years. We have seen the market evolve significantly over this time and are proud to say we have played a part in this evolution as we look to help clients find the right solution to manage longevity risk.

BCG: Can you explain the role that reinsurers play in the global pension risk transfer market?

Mulcahy: The pension risk transfer market is, at its core, about the efficient allocation of risk. At a high level the risks of defined benefit pensions can be decomposed into investment risk and longevity risk. Those risks can have naturally different homes. The provider that can best manage investments may not be an expert in assessing and managing longevity risk, or they may have capacity constraints as to the amount of longevity risk they can retain. This is where the more traditional reinsurers play a role as we have the expertise to quickly assess and assume longevity risk as part of the pension risk transfer process. Insurers on the other hand or private equity backed firms (either as insurers or reinsurers) often tend to be more interested in managing the investments.

Large volumes of pension liabilities are expected to come to the market over the next 10 years. Reinsurers will facilitate the market by providing longevity risk capacity and pricing knowledge to insurers. With large balance sheets, and a variety of risks such as traditional life insurance, reinsurers can diversify and are well placed to provide cost efficient capacity.

In the UK pension plans enter into longevity only risk transfer transactions with reinsurers. The reason for these transactions is either that the plan feels comfortable managing its investment risks but not longevity or that they wish to start a “de-risking journey” where the plan locks in their longevity costs as a starting point to a full transfer of the plan’s risk. The plan can then execute a full risk transfer program when financial conditions are most conducive to do so. This has happened a number of times in the UK market with the longevity swap transferring from the pension plan to the insurance company that executes the full PRT transaction.

BCG: From your perspective as a reinsurer how are you seeing COVID-19 impact the pension risk transfer market globally?

Mulcahy: The impact of COVID-19 on the market has been lagging. Strong activity continued in 2020 as transactions which were well developed by the time of COVID-19 generally continued through to completion. With plan sponsors dealing with the operational and economic impacts of COVID-19 starting in the second quarter of 2020, pension de-risking fell down the list of priorities. The lead time for bringing de-risking transactions to the market is significant, so the volumes of deals in the first half of 2021 were down somewhat in both the US and the UK versus previous years. However, we are expecting a stronger finish to 2021 in both markets, with a further pick-up in 2022.

BCG: Given the level of uncertainty caused by COVID-19 how are you as a reinsurer setting longer term assumptions?

Mulcahy: While COVID-19 has had a large impact on mortality rates over the last 18 months, there is still considerable uncertainty on the longer-term outlook.

It is looking increasingly likely COVID-19 will become an endemic disease and, even with vaccines, could continue to result in a significant number of additional deaths in years to come. There is significant uncertainty as to how the nature of the vaccine will evolve, but one plausible outcome is that it could become comparable to influenza, a disease which causes a substantial number of deaths each year. The disruption caused by COVID-19 has also resulted in a backlog of screenings and treatment, particularly for cancer, which is likely to lead to later diagnoses and, as a result, additional deaths for several years into the future.

The outlook is not all bleak, however, and there are also factors which may result in fewer deaths in the future. Messenger RNA vaccines could be developed for a range of other diseases in addition to COVID-19. Greater awareness of basic protections, such as hand and respiratory hygiene and the importance of ventilation, could help reduce future deaths from COVID-19 as well as other transmissible diseases. We have also observed increases in health and social care spending which, if maintained, are likely to have positive impacts on future health and mortality.

As a reinsurer, we must balance these factors in setting our long-term assumptions, while at the same time ensuring we hold a sufficient buffer to cover payments if people live for longer than expected.

BCG: What are the considerations as to how the COVID-19 pandemic might have different impacts on mortality for pensioners than for the general population?

Mulcahy: The pandemic has had a higher impact on mortality for some sections of the population than others, with additional deaths concentrated in older lives, those with pre-existing co-morbidities, and the less affluent. Pension liabilities tend to be relatively small in these groups (due to low life expectancies or small pension benefits). There are also substantial regional differences, both within and between countries. For these reasons, while we closely monitor emerging trends in the general population, we must also consider the age, geographic, and socioeconomic profile of pension plans in assessing the likely impact of the pandemic.

BCG: It may be a difficult decision to purchase longevity protection in the midst of a pandemic since the financial benefit of higher mortality will be transferred to the reinsurer. Are there any innovative alternatives to reduce longevity risk in the context of the current uncertainty?

Mulcahy: There are solutions which can be used to protect against particularly large increases in life expectancy. These tend to be low cost, as the premiums reflect the fact that the pension plan or insurer is retaining the risk of less extreme increases in life expectancy.

Canada Life Re has developed several such innovative solutions to hedge “out of the money” longevity risk. One such solution is for the plan or insurer to purchase the option to enter into a longevity swap in the future at a preagreed premium rate. This way the purchaser is not locked into the cost of a permanent longevity swap but does have protection against the risk of a significant future increase to life expectancy. Another option could be a long-term stop loss solution, which provides a payout if the benefits paid to members exceed a fixed threshold.

BCG: On the theme of innovation, we often see a reluctance from reinsurers to take on longevity risk for deferred participants. Is Canada Life Re willing to offer deferred life capacity?

Mulcahy: Yes, Canada Life Re does provide deferred life capacity. Ultimately, for plans to fully de-risk, they must be able to pass on both the deferred lives as well as the inpayment liabilities. We are happy to support plans in doing this. We must, however, manage our own risk in a prudent manner, so there are some limits to what we can provide. The capacity we can offer in a particular circumstance will depend on a number of factors, including the data available to support the starting mortality assumptions, the age profile of the deferred lives, and the amount of in-payment lives that are also being transferred.


Sample Interest Rates for a Pension Annuity Buyout
(Assumes no lump sums, disability, or unusual provisions)

Retirees (duration of 7) – 1.88%
Term Vesteds (duration of 10) – 2.09%
Actives (duration of 15) – 2.22%

Annuity Purchase Rates as of October 1, 2021