(March 4, 2014) — Canada is the cheapest location for pension-risk transfer (PRT) deals while the UK is the most expensive, according to data provided by Mercer.
The firm’s pension buyout index included data from 18 independent third-party insurers in defined benefit markets in the US, UK, Canada, and Ireland. As of January 2014, the cost of insuring £100 million ($167 million) worth of retiree obligations in Canada was just 5% more than the equivalent accounting liabilities, compared to 8.5% in the US and 17% in Ireland.
“Financial health of Canadian pension plans improved dramatically in 2013, which has created further opportunities to de-risk,” said Hrvoje Lakota, a head strategist at Mercer Canada. “For the first time in more than a decade, some plan sponsors are in an enviable position where they can discharge their pension obligations and take them off their books without having to make additional cash contributions. As a result, 2013 was a record year for the Canadian annuity market and we expect to continue to see significant growth in the coming years.”
Mercer secured large volumes of PRT deals in Canada last year, particularly in the last quarter. “The annuity market [is expected to] balloon in size as more employers review the implications of a potential annuity buyout or buy-in for their plans,” the report said.
At the other end of the cost spectrum, according to Mercer, was the UK. A plan sponsor in London would pay nearly five times the premium on its liabilities to annuitize as its counterpart in Toronto would (23% vs. 5%). Mercer found that such high prices are a result of a mandatory indexation of pension benefits in line with inflation, causing a hike in liability durations as “insurance companies charge an additional premium to take on inflation risk.”
According to Mercer, these challenges have yet to push away PRT deals. There were nearly 200 bulk annuity transactions in the UK last year, including the £1.5 billion EMI Group pension fund buyout.
Its neighbor Ireland also hit a record year for bulk annuity transactions, largely driven by “statutory deadline for submitting deficit repair plans to the regulator,” according to Mercer. Sovereign annuities also helped lower costs.
The US is expected to have a strong year in 2014, supported by rising interest rates and bull markets that helped improve plan funding levels. The rising PensionBenefit Guaranty Corporation premiums will likely also make risk transfer even more appealing to plan sponsors, Mercer contended.
“Although the US lacked a repeat of the jumbo deals of 2012, 2013 remained a strong year for buyouts. Interest rates and equity markets both jumped in 2013, improving plan funding levels and reducing the potential cash outlay required for buyout,” the report said.
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