Inflation causing demand for de-risking inflation linked benefits: Sun Life

'We've seen this incredible evolution in folks appreciating the benefits that a group annuity can bring,' says head of DB solutions at Sun Life

Inflation causing demand for de-risking inflation linked benefits: Sun Life

For the sixteenth year in a row, Sun Life continues to lead the group annuity market, according to the Secure Retirement Institute Canadian Pension Market report, which was published by LIMRA. In 2023, Sun Life also made over $1.25 billion in annual pension payments to more than 125 thousand Canadians.

The findings come from Sun Life’s 2023 industry watch that highlights plan sponsors continue to de-risk, with over 140 defined benefit plan sponsors having purchased group annuities. More than 20 buyers or plan sponsors also repeated an annuity transaction, often several times.

“If you look back 10 or 15 years ago, the annuity market in Canada was maybe a billion dollars, give or take and the only folks that were purchasing group annuities were plan sponsors whose pension plans were winding up,” says Brent Simmons, senior vice president and head of defined benefit solutions at Sun Life. “Now, we've seen this incredible evolution in folks appreciating the benefits that a group annuity can bring, especially around pension risk management, and specifically pension risk transfer.”

Last year, according to Sun Life, the Canadian group annuity market reached $7.8 billion purchases, up 77 per cent from 2020. Going into 2024, Simmons says Sun Life is tracking $18 billion worth of potential annuity purchases, noting not all of those will go to market.

“It's more than double the size of the market last year, so it just shows you how many plan sponsors are investigating this as a solution,” Simmons says. “Annuities, as a solution, has gone from 15 years ago, being a solution of last resort for pension plans that were winding up, to now being a really helpful solution, because they have a higher yield than provincial bonds and they give you this risk transfer.”

Simmons added this comes after seeing “a mega trend” of plan sponsors in the UK, US and Canada, who are proactively purchasing annuities to solve some of these challenges for themselves. Another trend Sun Life is seeing, Simmons noted, is more plan sponsors de-risking, shrinking their size of pension plans.

Inflation, like many Canadians, is a factor that is always on plan sponsors’ minds and Simmons says it’s only reminded plan sponsors that “things are not always a nice 1 ½ to 2%.”

“In Canada, we can get a lot of volatility,” he said. “Plan sponsors that have benefits that are linked to inflation actually have to increase the pensions paid to their retirees every year by that amount of inflation.”

The simple formula, he noted, is if inflation was 4% last year, everybody's pensions are going up 4% this year. “So, for a lot of plan sponsors, that's a that's a risk that they didn't attach a high probability to because we were in such a benign inflation environment.”

What Sun Life has noticed, Simmons points out, is not just a huge increase in the demand for de-risking, but also a huge increase in the demand for de-risking for inflation linked benefits.

“The market in Canada last year was $925 million of inflation linked annuities. In fact, the volume of the annuities in the last three years that are inflation linked in Canada, has been greater than the volume in the previous eight years. So, it’s really a huge increase in demand because plan sponsors have this risk, and they want to find a way to transfer that risk to an insurance company, so they don't have to worry about it as much.”

At the end of the day, Simmons says the reward in his role comes from helping Canadians do what they need to do in their retirement.

“We're really honoured to pay about $1.25 billion of pension every year to 125,000 Canadians,” Simmons said. “We're really lucky to be providing lifetime financial security, making sure that these older Canadians are getting money every month so that they can go on vacations, pay their property taxes, buy gifts for their grandchildren, whatever it happens to be. It's a really nice space to be in, knowing that what we're doing is creating financial security.”

“This can be really intellectually challenging and complicated with a lot of different layers,” he added. “And it's dealing with real people as well. Being able to meld that technical, intellectual world with the real world of paying people's pensions and keeping our promises, that's really fun as well as really challenging.”