March 04, 2014
Partner Mitch Frazer weighs in on pension buyouts in Canada in the Globe and Mail. Below is an excerpt of the article.
A Canadian company has signed an agreement to outsource its pension plan risk by buying about $500-million of annuities, spotlighting the growing interest in such purchases from companies eager to reduce the volatility of their retirement plans.
The agreement, which is the largest group annuity deal of its kind in Canada, echoes a pattern that is already well established in the United States and Britain, as companies seek to “de-risk” defined-benefit pension plans.
The Canadian deal was revealed by consulting firm Towers Watson and involved a client who does not want to be identified. The annuities were purchased from insurer Industrial Alliance Insurance and Financial Services Inc.
Mitch Frazer, who advises companies on their pension plans, said he does not think pension buyouts will become a major trend in Canada until interest rates return to higher levels. At current rates, he said, it is still costly to buy annuities to cover an entire pension plan’s funding liability. “It’s certainly a trend – it’s something that clients ask about frequently,” he said. “But in terms of the practicality, a lot of them are still kicking the tires right now.”
If interest rates were to climb sharply, however, Mr. Frazer said he would recommend the deals to many companies. “Because really, companies are not in the business of running their pension plans, and more mature companies that have been around for a long time have very large plans,” he said.
For the full article, click here.