THE INSIDER S GUIDE TO THE CANADIAN ANNUITY MARKET

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1 THE INSIDER S GUIDE TO THE CANADIAN ANNUITY MARKET Hugh Kerr Vice- President & Associate General Counsel Heather Wolfe Managing Director, Client Relationships Defined Benefit Solutions Association of Canadian Pension Management March 18, 2014 sunlife.ca/dbsolutions

Director, Client Relationships Defined Benefit Solutions

2 AGENDA The market The myths The trends 2

3 THE MARKET 3

4 GLOBAL DB PENSION MARKET DB pension liabilities (estimates) Closed DB plans 2013 risk transfer deals Canada $1.4 trillion 40% $2.2 billion U.S. $3 trillion 60% $3.8 billion U.K. 2 trillion 80% 16.3 billion Source: Various sources and Sun Life estimates 4

4 trillion 40% $2.2 billion U.S. $3 trillion 60% $3.8 billion U.

5 HOW BIG IS THE CANADIAN ANNUITY MARKET? 2,500 2,218 Group annuity market (in C$ millions) 2,000 1,500 1, ,182 1,012 1, ,362 1, Source: LIMRA 5

millions) 2,000 1,500 1,000 500 1,182 1,012

6 U.K. RISK TRANSFER TRANSACTIONS Cumulative buy-outs, buy-ins and longevity insurance 50 Total business ( bn) Longevity insurance Buy-ins Buy-out Dec Dec Dec Dec Dec Dec Dec Source: Lane Clark & Peacock LLP 6

Longevity insurance Buy-ins Buy-out 10 5 0 Dec. 2006 Dec. 2007 Dec.

7 THERE S A CANADIAN SOLUTION FOR EVERY SITUATION Keep longevity risk? Liability driven investing (LDI) LDI + longevity insurance Want to shrink DB plan? Annuity buy-in Is cash top-up a concern? Is plan large or indexed? Annuity buy-out Transition asset portfolio Annuity purchase by in kind asset transfer 7

plan? Annuity buy-in Is cash top-up a concern? Is plan large or indexed?

8 ANNUITIES Annuity buy-out Insurer Annuity buy-in Insurer Single premium Monthly pensions Single premium Monthly pensions Pension plan Retirees Pension plan Monthly pensions Retirees Plan pays single premium to insurer Insurer makes guaranteed payments to participants Insurer covers investment and longevity risk May trigger settlement accounting and require top-up Irrevocable 1 Pension plans should confirm treatment with their auditors Plan pays single premium to insurer Insurer makes guaranteed payments to plan Insurer covers investment and longevity risk Does not trigger settlement accounting 1 or require top up Convertible to buy-out at any time 8

settlement accounting and require top-up Irrevocable 1 Pension plans should confirm treatment with their auditors Plan pays single premium to insurer Insurer makes

9 ANNUITY BOOMERANG RISK Boomerang risk is the potential for the pension liability to revert to the plan sponsor s balance sheet if an insurer becomes insolvent Province Annuity buy-in Annuity buy-out (ongoing plan) Annuity buy-out (wound-up plan) British Columbia Risk exists Full discharge 1 Full discharge Alberta Risk exists Full discharge Full discharge Ontario Risk exists Risk exists Full discharge Quebec Risk exists Risk exists 2 Full discharge Federal Risk exists Risk exists Full discharge Notes: 1 Bill introduced in B.C. legislature in February; regulations under development 2 In Quebec, the D Amours report recommends a full discharge of liability and changes are expected this year Industry stakeholders are advocating for change 9

exists Risk exists Full discharge Quebec Risk exists Risk exists 2 Full discharge Federal Risk exists Risk exists Full discharge Notes: 1 Bill introduced in B.C.

10 THE MYTHS 10

11 INSUFFICIENT CAPACITY? 2013 group annuity market was $2.2 billion largest yet 2014 market expected to be even larger 8 Canadian insurers included in LIMRA group annuity reporting Interest from global reinsurers provides greater capacity 11

larger 8 Canadian insurers included in LIMRA group annuity

12 A LARGE DEAL CAN T BE DONE IN CANADA? Canadian group annuity market estimated single day transactions over $150 million Sales ( in C$ millions) March 2009 August 2009 September 2011 February 2012 June 2013 June 2013 Q Source: Sun Life Financial estimates 12

$150 million Sales ( in C$ millions) 400 350 300 250 200 400 500 150 100 50 230 170

13 A LARGE DEAL CAN T BE DONE IN CANADA? Canadian group annuity market estimated number of single day transactions over $50 million Source: Sun Life Financial estimates 13

single day transactions over $50 million 15 10 5 11

14 SACRIFICING BENEFIT SECURITY? Insurance protection Strong risk management culture 100% fixed income Daily asset liability matching Prudent assessment of liabilities Custom longevity assumption 100% best estimate + PfADs of 4% to 6% Regulatory and voluntary capital 6% to 9% of best estimate liabilities OSFI monitoring OSFI early intervention Low probability of default + High expected recovery Assuris 14

Prudent assessment of liabilities Custom longevity assumption 100% best estimate + PfADs of 4% to 6%

15 ANNUITIES ARE EXPENSIVE? 2.0% Canadian annuities are great value vs. bonds Additional Annual Yield from Annuity Purchase (%) 1.5% 1.0% 0.5% 0.0% Net Expected Return on Annuity Purchase less Net Expected Return on Matching Bond Portfolio Source: PC Bond, a business unit of TSX Inc. and Sun Life estimates 15

0% 2007 2008 2009 2010 2011 2012 2013 Net Expected Return on Annuity Purchase less

16 ANNUITIES ARE EXPENSIVE? Canadian annuities are great value vs. other countries PREMIUM OVER ACCOUNTING LIABILITIES Canada 5.0% U.S. 8.5% Ireland 17.0% U.K. 23.0% Source: Mercer Global Pension Buyout Index, January

17 WAIT FOR HIGHER INTEREST RATES? When interest rates rise Annuity prices Bond values Affordability of annuities unchanged 17

18 NO SOLUTIONS FOR CPI- LINKED INDEXING? Buy annuities for accrued benefits Amend indexing formula Purchase CPIlinked benefits Leave indexing in plan Replace CPIlinked indexing with flat indexing Transfer inflation risk to insurer Canadian Wheat Board $150 million 18

CPIlinked benefits Leave indexing in plan Replace CPIlinked

19 THE TRENDS 19

20 OPTIMIZE USING IN- KIND ASSET TRANSFERS Existing portfolio Set target price Set target price Transition asset portfolio In- kind asset transfer Annuity purchase 20

21 FOCUS ON BENEFIT SECURITY SUN LIFE INVESTMENT MANAGEMENT INC. Alternative asset classes Private Fixed Income Private Plus Fixed Income Plus LDI strategies Commercial Real LDI Mortgages A CONTINUUM Estate OF Strategies SOLUTIONS Commercial Real LDI Mortgages Estate Strategies DEFINED BENEFIT SOLUTIONS DEFINED * BENEFIT Annuity Longevity SOLUTIONS insurance * buy-out / buy-in Longevity Insurance Longevity Insurance Annuity Buy-out / Buy-in ENHANCE YIELD REDUCE VOLATILITY TRANSFER RISK 21

22 EMBRACE NEW SOLUTIONS LIKE ANNUITY BUY- INS ANNUITY BUY- IN CAN BE USED TO RIGHT SIZE YOUR PLAN Can provide a higher yield than a DEX bond portfolio with duration of your liabilities No top-up contribution required for under funded plans No settlement accounting impact (confirm with your auditor) Longevity and investment risk transferred to insurer SINCE 2009 (Approximate) 15 ANNUITY BUY- INS IN CANADA ANNUITY BUY- IN CAN BE USED DURING WIND- UP PROCESS Transfer longevity and investment risk before a wind-up report is approved Convert annuity buy-in to annuity buy-out at any time $ 370 M ILLION LIABILITIES 22

23 PLAN AHEAD AND BE STRATEGIC Get on the shelf Internal discussions Get illustrative quote Risk transfer Set trigger and monitor pricing Transition assets Engage stakeholders Execute efficiently 23

24 sunlife.ca/dbsolutions

These aren t your grandmother s annuities. Brent Simmons Senior Managing Director, Defined Benefit Solutions

These aren t your grandmother s annuities Brent Simmons Senior Managing Director, Defined Benefit Solutions AGENDA 1 2 3 New philosophy Risk transfer innovations Pricing insights Page 2 NEW PHILOSOPHY