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Canadian Wheat Board tackles pension risk with annuity

The Canadian Wheat Board building is shown in Winnipeg.


The Canadian Wheat Board inked a $150-million deal to buy an annuity policy that will transfer the risk in its defined benefit pension plan to a subsidiary of insurer Sun Life Financial Inc.

The move comes as many pension funds in Canada and other markets such as the U.S. and U.K. are facing underfunded pension plans battered by stock market volatility, prolonged low interest rates and longer life spans.

"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," said Andrea Carlson, vice-president of corporate finance and strategy at CWB, said in a statement.

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CWB has bought one big annuity contract issued to the pension fund itself, which is called an "annuity buy-in." The annuity acts as an investment made by the fund, and doesn't transfer the responsibility to pay from the company to the insurer. Periodic payments are made from the insurer to the fund. This is the largest buy-in that Sun Life has done for a company.

That's different than an "annuity buy-out," which transfers all of the risk and responsibility off of the company's balance sheet. Such a deal requires buying annuity contracts for each individual retiree to be paid by the insurer. Sun Life's largest buyout was worth roughly $400-million.

These kinds of pension plan transfers are called "de-risking solutions" by the insurance industry. There are two key forms of risk that plan administrators are looking to shed, says Brent Simmons, senior managing director of defined benefits solutions at Sun Life Financial. The first is longevity risk – people might live longer than expected. And then there's investment risk – Sun Life needs to post gains on the lump sum collected in order to make the payments and make a profit.

The CWB deal has the added complication of being an "inflation linked" promise, which means the commitments of the pension plan increase with inflation, and Sun Life needed to find assets to back the annuity that move in the same direction. Mr. Simmons this this could set a precedent for other similar deals.

The Office of the Superintendent of Financial Institutions issued a comment last year on buy-in annuities, stating that as long as this type of investment is allowed under the terms of the plan, "we would have no objections in principle to a federally regulated pension plan investing in a buy-in annuity issued by a life insurance company for pensions in pay."

Over the last couple of years, Sun Life has done a lot of educational "missionary" work to show companies what buying these annuities can do. But market watchers have been calling for the arrival of large-scale pension annuity deals in Canada for years. The movement first picked up steam in the U.K. roughly a decade ago. Last year, the market in North America heated up after General Motors Co. and Verizon Communications Inc. both reduced their pension obligations through U.S.-based insurer Prudential Financial Inc. The two companies transferred $29-billion (U.S.) and $7.5-billion, respectively, in pension obligations to Prudential – these were just portions of the companies' overall plans.

"Ever since GM announced their multi-billion dollar deal last June we've been getting a lot more incoming calls," Mr. Simmons said. Many asked the same question: how large of an annuity deal would markets support?

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"Sponsors and employers were really surprised to hear us say we'd be happy to do a deal that was billions of dollars. You know, $3-billion or $4-billion is very, very manageable. And that covers 99 per cent of the pension funds in Canada in terms of size," Mr. Simmons said.

Sun Life's Wheat Board deal is a relatively small transaction, but Mr. Simmons said the Canadian marketplace could still see a $1-billion transaction within the year. Sun Life is already in talks with companies looking to tackle billion-dollar plans, but the lead times on these deals are very long. Even the CWB transaction took seven months to co-ordinate.

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