An annuity buy-in transfers all the risks for a group of members from the plan sponsor s balance sheet to

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1 DB Solutions Risk less Annuity buy-in (Pensurance ) Risk transfer for underfunded plans An annuity buy-in transfers all the risks for a group of members from the plan sponsor s balance sheet to Sun Life Financial s balance sheet. This reduces the size of the remaining pension plan, which reduces contribution volatility and the impact of the pension plan on earnings per share and capital positions. Plan sponsors can do what they do best and focus on their core business. This solution is perfect for plan sponsors who want to shrink the size of their open or closed pension plan, but who do not want to trigger an accounting settlement 1 or make a top-up contribution for an underfunded plan. How does it work? In exchange for a lump sum premium, Sun Life makes a monthly payment to the pension plan equal to the pension payments for the covered retirees, and the plan continues to pay each retiree directly. The annuity buy-in is invisible to plan members and the plan sponsor continues to provide administration for them. The annuity buy-in is an insurance contract held as an investment of the pension plan. Because it is an investment of the pension plan, no top-up contribution is required for an underfunded plan and no accounting settlement is triggered. In the event that the pension plan winds up, the annuity buy-in will automatically convert to an annuity buy-out. If the plan winds up in a deficit position, it is possible that members benefits under the annuity buy-out would be reduced and the value of the reduction refunded to the pension plan. (Please see our annuity buy-out product sheet for more information about that solution). What are the advantages? Annuity buy-ins provide most of the same great benefits as annuity buy-outs, along with added flexibility for plan sponsors. No top-up contribution: Unlike an annuity buy-out, an annuity buy-in does not require the plan sponsor to make a top-up contribution if the plan is underfunded. No accounting settlement: As another pension plan investment, an annuity buy-in does not trigger an accounting settlement, unlike an annuity buy-out (in most jurisdictions). Risk reduction now; conversion later: Plan sponsors can convert an annuity buy-in to an annuity buy-out whenever they choose, for example, once top-up contributions and accounting settlements are no longer a concern. Invisible to retirees: The plan sponsor maintains the same relationship with the retirees. 1 Based on Sun Life s consultation with several Canadian accounting firms. Each plan should confirm accounting treatment with their auditors. Sun Life can provide information to assist the auditor s review.

2 Annuities as an asset class: The super bond Compare the expected yield of a typical pension plan from purchasing an annuity to the expected yield from investing in a bond portfolio, and you may be surprised to see in the graph below that annuities provide higher yields than a bond portfolio. This means that the added longevity and investment risk protection provided by annuities is free! This may seem too good to be true, but insurers often have access to higher yielding investments that can result in attractive prices for plan sponsors. Bringing U.K. pension risk transfer strategies to Canada Although the next generation buy-in concept is new to North America, it is an established de-risking solution in the United Kingdom. Recent reports suggest that annuity buy-ins are now significantly more popular than annuity buy-outs in the U.K. because of their flexibility. In just five years, the U.K. pension risk transfer market has grown from about 1 billion per year in 2006 to over 12 billion in Note to graph: We have assumed that the bond portfolio is invested in 50% DEX Long and 50% DEX Universe to target a duration of 10 years, to match a typical retiree group. Where to start? An illustrative quote from Sun Life The Defined Benefit Solutions team can provide plan sponsors with a non-binding illustrative quote the perfect first step in a de-risking journey. This personalized analysis provides an estimated cost of risk transfer and tips to help plan sponsors get the best annuity price. There is no cost for preparing an annuity quote and it is a straightforward process that can usually be completed in about two weeks. Contact us: Brent Simmons, Senior Managing Director, Defined Benefit Solutions T: , brent.simmons@sunlife.com Heather Wolfe, Assistant Vice-President, Defined Benefit Solutions T: , heather.wolfe@sunlife.com We ve been in the annuities business since the first Sun Life annuity contract was issued in The Defined Benefit Solutions team is dedicated to helping you take advantage of this innovative approach. Learn more about the role that Pensurance or other solutions can play as part of your DB plan s overall risk management strategy. Annuity solutions are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies. Distribution, republishing and reproduction of any part of this article is prohibited without prior written permission. 2012, Sun Life Financial. All rights reserved. DB Solutions Risk less

3 DB Solutions Risk less Annuity buy-out Transfer your risk An annuity buy-out transfers the risks for a group of members from the plan sponsor s balance sheet to Sun Life Financial s balance sheet. This reduces the size of the remaining pension plan, which reduces contribution volatility and the impact of the pension plan on earnings per share and capital positions. Plan sponsors can do what they do best and focus on their core business. This solution is perfect for plan sponsors who want to shrink the size of their open or closed pension plan. An annuity buy-out triggers an accounting settlement and in most jurisdictions requires a top-up contribution from an underfunded plan. If a plan sponsor wishes to avoid either an accounting settlement or a top-up contribution then the annuity buy-in solution is the better choice. How does it work? In exchange for a lump sum premium, Sun Life assumes responsibility for making pension payments to the covered group (which can include retirees and deferred members) and issues individual certificates to each member. Administrative and communications support is provided and includes maintaining a member call centre and issuing annual tax forms directly to members. What are the advantages? Reduced volatility: An annuity buy-out reduces contribution volatility and the impact of the pension plan on earnings per share and capital positions. This allows plan sponsors to spend less time worrying about their pension plans and more time running their businesses. Investment risk protection: Sun Life takes all responsibility for the investments backing the annuity buy-out. Any investment losses are the responsibility of Sun Life. Longevity risk protection: Sun Life takes all responsibility for paying the members of the covered group for as long as they live. If members live longer than expected, Sun Life covers the cost of these additional pension payments. Benefit security: Sun Life s robust capital policies and comprehensive risk management practices ensure that members benefits are well protected. Superior yields: In addition to providing investment and longevity risk transfer, an annuity buy-out can provide a higher yield than a typical bond portfolio for some plans. Flexibility: An annuity buy-out can be tailored to almost any set of plan provisions, including indexed plans.

4 Annuities as an asset class: The super bond Compare the expected yield of a typical pension plan from purchasing an annuity to the expected yield from investing in a bond portfolio, and you may be surprised to see in the graph below that annuities provide higher yields than a bond portfolio. This means that the added longevity and investment risk protection provided by annuities is free! This may seem too good to be true, but insurers often have access to higher yielding investments that can result in attractive prices for plan sponsors. Tips to get the best annuity price 1. Stagger purchases. Break large purchases into quarterly tranches of $100 to $200 million each. Divide each tranche into $50 million pieces. 2. Bundle deferred members with retirees. The characteristics of the combined group may be more attractive to insurers. 3. Stay connected. Timing is important when purchasing annuities. Talk to your insurer regularly for market and pricing insights. Note to graph: We have assumed that the bond portfolio is invested in 50% DEX Long and 50% DEX Universe to target a duration of 10 years, to match a typical retiree group. Where to start? An illustrative quote from Sun Life The Defined Benefit Solutions team can provide plan sponsors with a non-binding illustrative quote the perfect first step in a de-risking journey. This personalized analysis provides an estimated cost of risk transfer and tips to help plan sponsors get the best annuity price. There is no cost for preparing an annuity quote and it is a straightforward process that can usually be completed in about two weeks. Contact us: Brent Simmons, Senior Managing Director, Defined Benefit Solutions T: , brent.simmons@sunlife.com Heather Wolfe, Assistant Vice-President, Defined Benefit Solutions T: , heather.wolfe@sunlife.com We ve been in the annuities business since the first Sun Life annuity contract was issued in The Defined Benefit Solutions team is dedicated to helping you take advantage of this innovative approach. Learn more about the role that annuity buy-outs or other solutions can play as part of your DB plan s overall risk management strategy. Annuity solutions are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies. Distribution, republishing and reproduction of any part of this article is prohibited without prior written permission. 2012, Sun Life Financial. All rights reserved. DB Solutions Risk less

5 DB Solutions Risk less Liability driven investing (LDI) Reduce volatility due to asset and liability mismatch allow plan sponsors to better match movements in their assets to movements in their liabilities. This reduces the emergence of deficits, which reduces contribution volatility and the impact of the pension plan on earnings per share and capital positions. Plan sponsors LDIstrategies can do what they do best and focus on their core business. This solution is perfect for plan sponsors who wish to retain their plan s assets, but are looking to protect themselves against the volatility caused by mismatched assets and liabilities. This could be a plan sponsor who intends to maintain their pension plan for the long term, or a plan sponsor who intends to transition towards an annuity purchase in the medium term. How does it work? LDI means investing a pension plan s assets to behave like the plan s liabilities. That s why LDI assets are mainly fixed income: liabilities are driven by fixed income yields and changes in liabilities need to be offset by changes in assets. For example, if plan liabilities increase by 10% it won t affect a plan sponsor s bottom line as long as assets also increase by 10%. Sun Life Financial works with plan sponsors and their consultants to develop custom fixed income and/or derivative portfolios to match the pension plan s expected liabilities. Solutions can be very simple or complex depending on the plan sponsor s needs and investment policies. Combining an LDI strategy with longevity insurance can be a powerful tool to manage key pension plan risks, while still maintaining the assets in the plan. What are the advantages? Reduced volatility: An LDI strategy reduces contribution volatility and the impact of the pension plan on earnings per share and capital positions. This allows the plan sponsor to spend less time worrying about the pension plan and more time running their business. Flexibility: An LDI strategy can be tailored to almost any set of objectives, including matching accounting, solvency or going-concern liabilities. Expertise: Sun Life has more than 100 years of experience constructing LDI portfolios, including managing our own annuity portfolios and, more recently, creating custom portfolios for DB pension plans.

6 advantages, cont d Access: Sun Life receives priority attention from dealers (largely due to our strong relationships with them) and can access attractive assets that pension plans may not be able to obtain. Strong governance: Sun Life works with the plan sponsor and consultant to create portfolio parameters and procedures at each mandate s inception, including a custom benchmark for each mandate. Measurement and analysis: Sun Life s comprehensive quarterly reporting compares actual performance to the original portfolio objectives and includes a full attribution analysis. Rely on a market leader Sun Life Financial manages approximately $90 billion of fixed income assets, $50 billion of derivatives, and is involved in the purchase and sale of approximately $30 billion of public Canadian and U.S. bonds each year. This volume, as well as our ability to combine smaller bond purchases and sales with larger bond purchases and sales, creates an economy of scale that keeps transaction costs competitive. In 2011, Sun Life implemented a custom fixed income portfolio to match accounting liabilities for over $400 million of liabilities for a large Canadian company. (All data effective as at December 31, 2011.) LDI trends and opportunities LDI solutions are evolving to meet new demands and are growing in popularity. Just look at the United Kingdom: over 300 billion of pension plan assets are invested in LDI mandates. Emerging LDI strategies include customized segregated fund solutions; flexible, cost-effective pooled fund solutions for small and medium size plans; derivative overlays to provide risk reduction and interest rate swaps to extend the duration of a plan s assets. Where to start? Talk to the Defined Benefit Solutions team The Defined Benefit Solutions team can provide plan sponsors with details about LDI solutions, followed by a customized pricing quote at no cost. Contact us: Brent Simmons, Senior Managing Director, Defined Benefit Solutions T: , brent.simmons@sunlife.com Heather Wolfe, Assistant Vice-President, Defined Benefit Solutions T: , heather.wolfe@sunlife.com We ve been in the annuities business since the first Sun Life annuity contract was issued in The Defined Benefit Solutions team is dedicated to helping you take advantage of this innovative approach. Learn more about the role that liability driven investing or other solutions can play as part of your DB plan s overall risk management strategy. Liability driven investing solutions are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies. Distribution, republishing and reproduction of any part of this article is prohibited without prior written permission. 2012, Sun Life Financial. All rights reserved. DB Solutions Risk less

7 DB Solutions Risk less Longevity insurance Protect YOUR PLAN against unexpected increases in life expectancy L ongevity insurance allows plan sponsors to insure themselves against the extra pensions they would otherwise have to pay if their members live longer than expected. Medical advances and changing lifestyles make predicting future life expectancy a challenge, and misestimating it can be costly. For example, a one-year increase in life expectancy can result in a 3% to 5% increase in pension liabilities depending on the demographics of the plan. This solution is perfect for plan sponsors who are comfortable with their plan s investment risk, but are looking to protect themselves against unexpected increases in longevity. This is generally a plan sponsor who intends to maintain their pension plan for the long term. How does it work? In exchange for monthly premiums, Sun Life makes a monthly payment to the pension plan equal to the pension payments for the covered retirees, and the plan continues to pay each retiree directly. The schedule of monthly premiums paid by the plan is determined at contract inception and does not change - even if the covered retirees live longer than expected. This means that the plan sponsor has locked in its cost for the covered retirees. In return, Sun Life pays the plan the actual pension payments for the covered retirees each month. If pensioners live longer than expected, Sun Life s monthly payments cover the difference. In this way, longevity risk is transferred from the pension plan to Sun Life. Sun Life works with the plan sponsor and the consultant on every step in the process: Define the group of retirees to be covered by longevity insurance. Agree on the life expectancy of that group by considering past experience and other available data. Determine the schedule of monthly premiums needed to cover the expected pensions of the group and the cost of insurance. Combining a liability driven investing strategy with longevity insurance can be a powerful tool to manage key pension plan risks, while still maintaining the assets in the plan.

8 What are the advantages? Reduced volatility: Longevity insurance reduces contribution volatility and the impact of the pension plan on earnings per share and capital positions. This allows the plan sponsor to spend less time worrying about the pension plan and more time running their business. Longevity risk protection: Sun Life pays the pension plan in respect of the members of the covered group for as long as they live. If members live longer than expected, Sun Life covers the cost of these additional pension payments. Retain control of investments: Pre-determined monthly premiums allow pension plans to retain control of their assets and to continue to invest them as they see fit. Benefit security: Sun Life s robust capital policies and comprehensive risk management practices ensure that members benefits are well protected. Flexibility: Longevity insurance can be tailored to almost any set of plan provisions. Benefits are based on the actual experience of the covered group, as opposed to an artificial population index. Simplicity: Longevity insurance is documented using a group annuity contract, which is simple and short. Bringing U.K. pension risk transfer strategies to Canada Although longevity insurance is new to North America, it is an established de-risking solution in the United Kingdom. Longevity insurance was launched in the U.K. in By December 31, 2011, 12 longevity insurance deals had been completed, covering liabilities of over 14 billon. The U.K. market continues to grow and adapt to meet new demands from plan sponsors. With Sun Life s longevity insurance, Canadian plan sponsors now have access to this proven solution. Where to start? Talk to the Defined Benefit Solutions team The Defined Benefit Solutions team can provide plan sponsors with details about longevity insurance, followed by a customized illustrative quote. There is no cost for preparing an illustrative quote and it is a straightforward process that can usually be completed in about two weeks. Contact us: Brent Simmons, Senior Managing Director, Defined Benefit Solutions T: , brent.simmons@sunlife.com Heather Wolfe, Assistant Vice-President, Defined Benefit Solutions T: , heather.wolfe@sunlife.com The Defined Benefit Solutions team is dedicated to helping you take advantage of this innovative approach. Learn more about the role that longevity insurance or other solutions can play as part of your DB plan s overall risk management strategy. Longevity insurance is issued by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies. Distribution, republishing and reproduction of any part of this article is prohibited without prior written permission. 2012, Sun Life Financial. All rights reserved. DB Solutions Risk less