Sun Life

Headquarters	Toronto, Ontario, Canada
Year Founded	1865
Dedicated PRT Experience*	16 years
PRT Portfolio*	325+ Canadian PRT transactions
Website www.sunlife.ca/dbsolutions

^* As of December 31, 2023

Brent Simmons, FSA, FCIA

Senior Vice President & Head, Defined Benefit Solutions

Brent’s team helps some of Canada’s largest employers manage the risks in their defined benefit pension plans with innovative, customized solutions. Brent has 30 years of experience in pensions and has led the team since 2010 generating over CAD 26 billion of cumulative sales.

Follow Brent Simmons on LinkedIn or contact him at brent.simmons@sunlife.com.

BCG: Sun Life has been an active participant in the Canadian PRT market for over 15 years. Can you tell us about Sun Life’s experience in the market?

Simmons: Sun Life is fortunate to have been the Canadian PRT market leader for the last 16 years with an average market share of about 35%. Over that time, we’ve written about CAD 21 billion of group annuity premiums and are now responsible for the monthly pensions of over 125,000 annuitants. We’re proud to play a part in providing lifetime financial security to so many Canadians.

One contributing factor to our success has been a focus on innovation. We have a very talented team and have often been able to create new solutions to solve clients’ complex DB pension problems. The creativity and expertise of SLC Management (our affiliated investment manager) has been key to enabling many of these solutions.

We’ve also invested in education. When we started the PRT business 16 years ago, very few of our stakeholders – consultants, plan sponsors and regulators – understood that group annuities could be a proactive de-risking tool. Through education, we raised awareness and helped create a healthy PRT ecosystem with very engaged participants.

BCG: Can you give some background on the Canadian PRT market for our readers who might not be familiar with it, including the current size of the Canadian defined benefit market?

Simmons: The Canadian PRT market is a lot smaller than the US and UK markets. The transition from DB to Defined Contribution plans happened more slowly in Canada than in the US and the UK. This means that our closed DB plans often aren’t as mature as in other geographies and aren’t necessarily seen with the same legacy lens. Prior to 2013, the market for group annuities was about CAD 1 billion per year. Most transactions involved pension plans that were winding up and had no choice but to settle their benefits.

Fast forward to 2023 and the market was just shy of CAD 8 billion. The growth is largely from pension plans that are proactively purchasing annuities to de-risk. Like the US and UK, many Canadian companies have decided that they don’t want to be in the DB pension business and would rather spend their time running their core businesses. Purchasing annuities is a purposeful solution as it transfers DB pension risk and responsibility to an insurer.

In addition, we’re seeing transactions get larger. Ten years ago, a CAD 100 million transaction would have been noteworthy. Now it’s CAD 1 billion transactions that stand out. The broad pension ecosystem is very similar to the US and the UK. Transactions are almost always intermediated by a pension consultant who prepares an RFP on behalf of a pension plan and runs the bidding process on quote day. Like the US, insurers submit bids on the morning of quote day and the pension plan chooses the winning insurer by the end of the day.

Like the US and the UK, pension plan governance is a key driver of the PRT process. Pension committee meetings are often quarterly and the decision to purchase annuities is made after careful consideration. At times, the status quo wins out.

In terms of the current size of the Canadian DB market, at year-end 2023 market size (by plan assets) was estimated at CAD 1.6 trillion. However, much of these assets are held by large jointly sponsored pension plans that are unlikely to purchase annuities. We estimate that the addressable market for PRT is in the CAD 500 billion range.

BCG: It sounds like there are a lot of similarities between the Canadian and US markets. What differences would you call out?

Simmons: From a product perspective, buy-in annuities are much more popular in Canada than they are in the US. In fact, over the last 10 years, the Canadian market has been about 50% buy-ins and 50% buy-outs. Part of the explanation for this is that only one province in Canada has the equivalent of PBGC premiums. This means that there’s not the same financial incentive to get liabilities off the books using a buy-out as there is in the US.

From a structuring perspective, Canada has a long history of dividing transactions into tranches and awarding these tranches to different insurers. As a result, the need for insurers to be able to write jumbo transactions hasn’t been as great as in the US. This means that Canadian insurers have been able to write many smaller deals each year and create more diversified books. From a reinsurance perspective, the Canadian regulatory regime is more constrained than the US. This means that there aren’t the same opportunities to create value by reinsuring business offshore. As a result, longevity reinsurance and funded reinsurance aren’t commonly used in Canada.

The last difference to call out is that Canadian group annuity pricing seems to be more competitive than US or UK group annuity pricing.

BCG: Can you say more about pricing in Canada being more competitive?

Simmons: Absolutely. One way to compare group annuity pricing is to look at the spread that’s implied in the premium. In Canada, the spread is about 150 bps over Canadian federal bonds¹. In the US it’s 120 bps over Treasuries² and in the UK it’s 40 bps over gilts³. We can think of this spread as the amount of non-risk-free return that an insurer is passing along to a plan sponsor to make the sale. The higher the spread, the better the annuity looks compared to alternatives such as a DIY fixed income portfolio.

So, a Canadian insurer needs to earn higher asset portfolio returns and/or share a higher proportion of those asset portfolio returns with the pension plan than an insurer in the US or UK. I’m focusing on one metric - there are lots of other ways to compare pricing. And of course, profitability is harder to compare given different capital rules and different offshore reinsurance opportunities.

BCG: You mentioned that innovation has been key to Sun Life being the market leader in Canada for 16 years. What are some examples of innovation?

Simmons: As mentioned, the only pension plans that historically bought annuities were plans that were winding up and needed to transfer their liabilities to an insurer. As we spoke to clients and consultants, we realized that there was a need for different solutions. Here are a few examples:

• 2009: first modern buy-in annuity
• 2013: first asset-in-kind transfer
• 2013: first inflation-linked annuity
• 2016: first annuity for active members
• 2021: first deal that was largely deferred members

I’m happy that Sun Life was able to create these solutions to solve client needs and I’m sure we’ll see more innovation in the coming years.

BCG: In BCG’s newsletter last month, we published the article, “Current Asset Allocation Trends in Pension Risk Transfer”. Did you find anything in the article or the associated survey surprising or noteworthy?

Simmons: It’s a very well written and fascinating article. A lot of the observations in the article resonate with my Canadian experience. We’re working with the same liability and cash flow characteristics described in the article and – like the US – optimizing capital-adjusted returns is very important. This results in our Canadian PRT portfolio containing a high proportion of both public and private fixed income assets.

One fact from the article that surprised me is that two US insurers are allocating 7% to 10% of their PRT portfolios to non-fixed income investments. The Canadian capital requirements would make this fairly unattractive.

BCG: In closing, the Canadian PRT market continues to see record volume, can you talk about insurer capacity?

Simmons: Over the last 10 years, market demand has generally lagged insurer capacity. As mentioned, we’ve seen very attractive pricing for pension plans with most transactions having five to seven interested insurers. This year, there are CAD 18 billion of deals in discussion, which is more than double the recent market of CAD 8 billion. Not all of these deals will place, but it appears that we may be heading for a record year. In these circumstances, getting insurers’ attention early in the quote process is becoming more important.

Similar to the US and the UK, we may be at a tipping point where human resource capacity – at the insurers and the consultants – begins to impact the market. The result could be a limit on the number of deals coming to market and a reduction in the number of insurers bidding on each deal.

We have a very collaborative PRT ecosystem in Canada with lots of talented folks. I’m confident that by working together we can solve these challenges and continue to serve our clients with a competitive market.

¹ June 30, 2024, medium duration annuity proxy spread, published by the Canadian Institute of Actuaries.
² 120 bps over Treasuries is the average spread to Treasuries for BCG annuity placement winning bids (n=79) for the year ending December 31, 2023.
³ Lane Clark & Peacock LLP pension risk transfer update published June 2024.