Mercer Canada to play matchmaker with pension funds and insurers

Pension consulting firm Mercer Canada is setting up a new online pricing system that will allow companies to get one-stop quotes from insurers on annuity deals for their pension plans, betting that easier access to annuity data may break through the reluctance of many Canadian companies to adopt strategies to "de-risk" their plans.

Jean-Philippe Provost, who heads Mercer's retirement practice in Canada, said his firm has surveyed companies with pension plans to find out why so many have been unwilling to take advantage of new annuity deals to cover the risks they face from their pension plans, which has become a far more popular strategy in the United States and Britain.

A common response was that the deals are too complex and it is too difficult to get pricing information on comparative terms in Canada's opaque annuity market, he said.

"They are telling us it's way too time-consuming, there's no transparency on the pricing," Mr. Provost said in an interview following remarks at Mercer's annual pension forecast breakfast. "It's very difficult the way it's being presented by the [insurance] carriers – it's very opaque."

Mercer estimates that companies in Canada have pension plan obligations worth $1.4-trillion, yet only $20-billion, or less than 1.5 per cent of the total, has been "de-risked" using annuity deals to protect companies from longevity or investment risk or even fully transfer the pension liabilities to insurers.

Annuities are investment products that companies use to protect themselves from risks they face from their pension-plan obligations, such as investment volatility or risks related to the composition of plan members, such as increasing life expectancies. Companies using these "de-risking" strategies are still responsible for the pension plans and must ensure pensions are paid.

Much of the action happened in 2015, when deals totalled $7.5-billion, including $5-billion from single deal by Bell Canada to insure its pension "longevity" risk of workers living longer than expected. A big portion of the rest came from two other large deals, including one concluded in December and announced this week, which saw two unnamed Canadian companies team up to buy $530-million of annuities in a "buy-in deal" that will transfer their pension investment, longevity and inflation risk to insurer Sun Life Financial Inc.

Mr. Provost said there have been many other small pension annuity deals with an average value of just $20-million each, but most companies are still sitting on the sidelines.

He said some companies with small pension plans in particular said it is complex and expensive to manoeuvre through different annuity deals, complaining insurers attached different terms and conditions to pricing, making it hard to compare deals. Some also said pricing information changed between the time they asked for quotes and decided to proceed.

Mr. Provost said Mercer's project will be like "Priceline" for pensions, referring to the discount website that gives users an array of quotes on travel deals. Companies will be able to post information about the type of deal they are seeking, and insurers will offer estimates that will give companies easier access to comparative pricing information.

"We feel it's going to be a game changer for us," he said. "It's one-stop shopping …. We think the size of the transactions will increase, and we think they will happen a lot faster. And we think that it's going to be happening without too much time and involvement from our clients."

He said Mercer has spoken with various insurers and they are willing to participate. He said the system may also help promote more deals like the one announced Tuesday involving two unrelated companies that banded together to get better pricing.

"Once the data is on the platform, then it becomes our responsibility and the responsibility of the carrier to work together to see if there is a way to package those liabilities in a way that is beneficial for clients," he said.

The market for pension annuity deals has the potential to grow significantly if companies warm to the concept, but analysts say the market in Canada is also limited by the size of Canada's annuity market.

While there are $1.4-trillion in pension obligations in Canada, insurance analyst Tom MacKinnon of BMO Nesbitt Burns estimates about $600-billion could conceivably be shifted by companies under annuity transactions. However, Mr. MacKinnon said in a report Tuesday that Canada's insurers are not currently in a position to provide that much annuity product at the maximum level.

New sales must be backed by capital reserves, and Mr. MacKinnon estimates it would require $60-billion in new capital to support $600-billion of annuity sales. Canada's four largest publicly traded insurers have about $6-billion in total excess capital currently, so a major expansion of the annuity market to cover all pension obligations "would clearly take a long time."

Mercer said it will be paid fees from clients who use the service but will not be paid commissions from insurers, ensuring it remains independent.