THE INSIDER’S GUIDE TO THE CANADIAN ANNUITY MARKET

Hugh Kerr V i c e - P r e s i d e n t & A s s o c i a t e G e n e r a l C o u n s e l

Heather Wolfe M a n a g i n g D i r e c t o r , C l i e n t R e l a t i o n s h i p s D e f i n e d B e n e f i t S o l u t i o n s Association of Canadian Pension Management March 18, 2014

sunlife.ca/DBSolutions

A G E N D A

The myths

The trends

The market

2

THE MARKET

3

G L O B A L D B P E N S I O N M A R K E T

DB pension liabilities (estimates)

Closed DB plans 2013 risk transfer deals

Canada $1.4 trillion 40% $2.2 billion

U.S. $3 trillion 60% $3.8 billion

U.K. £2 trillion 80% £16.3 billion

Source: Various sources and Sun Life estimates

4

H O W B I G I S T H E C A N A D I A N A N N U I T Y M A R K E T ?

1,182 1,012

1,314

748

1,362

1,054

2,218

-

500

1,000

1,500

2,000

2,500

2007 2008 2009 2010 2011 2012 2013

Gro

up a

nnui

ty m

arke

t (in

C$

mill

ions

)

Source: LIMRA

5

U . K . R I S K T R A N S F E R T R A N S A C T I O N S

Source: Lane Clark & Peacock LLP

0

5

10

15

20

25

30

35

40

45

50

Dec. 2006 Dec. 2007 Dec. 2008 Dec. 2009 Dec. 2010 Dec. 2011 Dec. 2012

Tota

l bus

ines

s (£

bn)

Cumulative buy-outs, buy-ins and longevity insurance

Longevity insurance

Buy-ins

Buy-out

6

T H E R E ’ S A C A N A D I A N S O L U T I O N F O R E V E R Y S I T U A T I O N

Want to shrink DB plan?

Keep longevity risk?

Liability driven investing (LDI)

LDI + longevity insurance

Is plan large or indexed?

Is cash top-up a concern?

Annuity buy-in

Annuity buy-out

Transition asset portfolio

Annuity purchase by in kind asset

transfer

7

• Plan pays single premium to insurer

• Insurer makes guaranteed payments to participants

• Insurer covers investment and longevity risk

• May trigger settlement accounting and require top-up

• Irrevocable

A N N U I T I E S

Annuity buy-out

Insurer

Retirees Pension plan

Annuity buy-in

Insurer

Retirees Pension plan

• Plan pays single premium to insurer

• Insurer makes guaranteed payments to plan

• Insurer covers investment and longevity risk

• Does not trigger settlement accounting1 or require top up

• Convertible to buy-out at any time

Monthly pensions

Single premium

Single premium

Monthly pensions

Monthly pensions

1 Pension plans should confirm treatment with their auditors

8

A N N U I T Y B O O M E R A N G R I S K

Province Annuity buy-In Annuity buy-out (ongoing plan)

Annuity buy-out (wound-up plan)

British Columbia Risk exists Full discharge1 Full discharge

Alberta Risk exists Full discharge Full discharge

Ontario Risk exists Risk exists Full discharge

Quebec Risk exists Risk exists2 Full discharge

Federal Risk exists Risk exists Full discharge

Boomerang risk is the potential for the pension liability to revert to the plan sponsor’s balance sheet if an insurer becomes insolvent

Notes: 1 Bill introduced in B.C. legislature in February; regulations under development 2 In Quebec, the D’Amours report recommends a full discharge of liability and changes are expected this year

Industry stakeholders are advocating for change

9

THE MYTHS

10

I N S U F F I C I E N T C A PA C I T Y ?

2014 market expected to be even larger

2013 group annuity market was $2.2 billion – largest yet

8 Canadian insurers included in LIMRA group annuity reporting

Interest from global reinsurers provides greater capacity

11

A L A R G E D E A L C A N ’ T B E D O N E I N C A N A D A ?

Source: Sun Life Financial estimates

400

155 150

230 170 190

500

0

50

100

150

200

250

300

350

400

450

500

550

March 2009 August 2009 September 2011 February 2012 June 2013 June 2013 Q4 2013

Sal

es (

in C

$ m

illio

ns)

Canadian group annuity market – estimated single day transactions over $150 million

12

A L A R G E D E A L C A N ’ T B E D O N E I N C A N A D A ?

Source: Sun Life Financial estimates

2

7 7

11

0

5

10

15

2010 2011 2012 2013

Canadian group annuity market – estimated number of single day transactions over $50 million

13

Custom longevity assumption 100% best estimate + PfADs of 4% to 6%

100% fixed income Daily asset liability matching

Insurance protection

S A C R I F I C I N G B E N E F I T S E C U R I T Y ?

Strong risk management culture

Prudent assessment of liabilities

Regulatory and voluntary capital

OSFI monitoring

OSFI early intervention

Assuris

Low probability of default

+

High expected recovery

6% to 9% of best estimate liabilities

14

A N N U I T I E S A R E E X P E N S I V E ?

0.0%

0.5%

1.0%

1.5%

2.0%

2007 2008 2009 2010 2011 2012 2013

Addi

tiona

l Ann

ual Y

ield

from

Ann

uity

Pur

chas

e (%

)

Net Expected Return on Annuity Purchase less Net Expected Return on Matching Bond Portfolio

Source: PC Bond, a business unit of TSX Inc. and Sun Life estimates

Canadian annuities are great value vs. bonds

15

A N N U I T I E S A R E E X P E N S I V E ?

Source: Mercer Global Pension Buyout Index, January 2014

Canadian annuities are great value vs. other countries

PREMIUM OVER ACCOUNTING LIABILITIES

Canada 5.0%

U.S. 8.5%

Ireland 17.0%

U.K. 23.0%

16

W A I T F O R H I G H E R I N T E R E S T R AT E S ?

When interest rates rise…

Annuity prices

Bond values

Affordability of annuities unchanged

17

N O S O L U T I O N S F O R C P I - L I N K E D I N D E X I N G ?

Buy annuities for accrued benefits

Leave indexing in plan

Amend indexing formula

Replace CPI-linked indexing

with flat indexing

Purchase CPI-linked benefits

Transfer inflation risk to

insurer

Canadian Wheat Board $150 million

18

THE TRENDS

19

O P T I M I Z E U S I N G I N - K I N D A S S E T T R A N S F E R S

Set target price E x i s t i n g

p o r t f o l i o S e t t a r g e t

p r i c e

Tr a n s i t i on a s s e t

p o r t f o l i o

I n - k i nd a s s e t

t r a n s fe r

An n u i t y p u r c h as e

20

F O C U S O N B E N E F I T S E C U R I T Y

Private Fixed

Income Plus

Commercial Mortgages

Real Estate

Longevity Insurance

LDI Strategies

D E F I N E D B E N E F I T S O L U T I O N S *

S U N L I F E I N V E S T M E N T M A N A G E M E N T I N C .

Private Fixed

Income Plus

Commercial Mortgages

Real Estate

Longevity Insurance

LDI Strategies

Annuity Buy-out /

Buy-in

D E F I N E D B E N E F I T S O L U T I O N S *

A C O N T I N U U M O F S O L U T I O N S

Alternative asset classes Longevity insurance LDI strategies

Annuity buy-out /

buy-in

E N H A N C E Y I E L D

R E D U C E V O L A T I L I T Y

T R A N S F E R R I S K

21

A N N U I T Y B U Y - I N C A N B E U S E D T O R I G H T S I Z E Y O U R P L A N • Can provide a higher yield than a DEX bond

portfolio with duration of your liabilities • No top-up contribution required for under

funded plans • No settlement accounting impact (confirm with

your auditor) • Longevity and investment risk transferred to

insurer A N N U I T Y B U Y - I N C A N B E U S E D D U R I N G W I N D - U P P R O C E S S • Transfer longevity and investment risk before a

wind-up report is approved

• Convert annuity buy-in to annuity buy-out at any time

E M B R A C E N E W S O L U T I O N S L I K E A N N U I T Y B U Y - I N S

S INCE 2 0 0 9 (Approximate)

370 M I L L I O N

LIABILITIES

$

15 A N N U I T Y B U Y - I N S

IN CANADA

22

P L A N A H E A D A N D B E S T R A T E G I C

Risk transfer Get illustrative

quote

Internal discussions

Get “on the shelf”

Transition assets

Set trigger and monitor pricing

Execute efficiently

Engage stakeholders

23

sunlife.ca/DBSolutions

hugh.kerr@sunlife.com 4 1 6 - 9 7 9 - 4 8 6 9

heather.wolfe@sunlife.com 4 1 6 - 4 0 8 - 7 8 3 4