West Fraser Timber Co. Ltd. isn’t annuitizing multiple defined benefit plans to get out of the pension business. In fact, the British Columbia-based integrated wood products company is committed to DB.
“We believe we get tremendous value out of our DB plans around recruitment and definitely around retention of our employees,” says Elaine Jensen, the company’s general manager of human resources.
As a result of acquisitions, West Fraser had 11 DB plans in 2017. “Just because we’re taking on risks, that doesn’t mean we shouldn’t look for opportunities to reduce or mitigate them, which is one of the reasons that we look towards things like annuitization,” says Jensen.
The company’s first two annuity buyouts, in 2017 and 2018, were for four closed DB plans with deferred and retired members. At the beginning of 2019, it took on a third deal for two large open plans — the West Fraser salaried plan and the non-union hourly plan.
Brent Simmons, senior managing director and head of DB solutions at Sun Life Financial, one of the insurers that annuitized West Fraser’s plans, says the company is part of a growing number of employers voluntarily purchasing annuities even when they aren’t winding up a plan.
“There’s a lot of misconception around annuity purchase being all about shutting down DB pension plans,” says Simmons. “It’s actually just the opposite, when most of the volume that we’re seeing is from pension plans that are still ongoing, but just want to manage their risk a little better [and] want to shrink their pension plans so they’re more manageable compared to the company’s [balance sheet].”
West Fraser’s annuitization isn’t over yet. “We have more plans, of course, that we want to annuitize and we’re going to continue to do that,” says Jensen. “We’ll look for opportunities to annuitize plans for our retirees when it makes sense to do so; in other words, when the pricing makes sense.”
To phase or not to phase?
Whether a plan sponsor annuitizes all of its plans at once or takes a phased approach depends on the size of the deal, says Azita Bassiji, a partner in retirement solutions at Aon, which worked with West Fraser on the transactions.
“When we’re dealing with large plan sponsors, such as West Fraser, . . . we would see them having a phased approach mainly because various plans may be at the various stages of de-risking and the trigger points for settlement may be different for different plans.”
A single annuitization requires a fairly homogenous population, such as an employer with one plan covering a similar workforce, says Andrew Whale, a principal at Mercer. “It’s typically larger corporations with multiple plans that try to do this in pieces — at least that’s sort of historically been the case.”
Whale has also seen large organizations that are unfamiliar with the annuity market annuitize a smaller plan first. “Annuitizing a smaller group can serve as a trial for some employers to go through the process, get familiar with it, on a basis that’s lower scale.”
Indeed, West Fraser dipped its toes in the water with its initial transactions, says Jensen. “That made sense. We did a couple of small plans to begin with in [the] 2017 deal. . . and then we did a much bigger deal in 2018 with two more closed plans. We’ve just been easing our way into it.”
And the company was able to apply lessons learned from the earlier transactions to the later ones, she says, pointing to the importance of data cleaning as an example. “In preparation for the first annuitization that we did in 2017 . . . it was a lot of work trying to get that data clean.”
Taking a phased approach also allowed West Fraser to enhance its retiree audit process. “What I feel that this did for us was it allowed us to be nimbler and more ready to annuitize in relatively short order when the right market conditions occur,” says Jensen.
The approach can also allow for dollar cash averaging, says Simmons. “Nobody really knows when the best time to buy annuities is, or when the market conditions will be the best, so if you’re buying them over a prolonged period, you’re going to catch some of the good times and the bad times and average out that cost.”
Also, if a plan is underfunded at the time of an annuity buyout, the plan sponsor must top it up, so breaking the annuitization into pieces can help control these cash contributions, he adds.
A bigger piece of the pie
On the other hand, going to market as part of a bigger annuity purchase can be advantageous, if the conditions make sense for a particular situation given the circumstances of the plans, says Benoit Labrosse, vice-president of asset and risk management at Morneau Shepell Ltd.
The reasons, he says, include volume, since a larger transaction amortizes the expenses across a large number of plan members. As well, larger transactions may be able to consider transfers in kind to pay the premiums requested by insurers.
Noting recent history, Whale says there can be pricing advantages when taking a larger group to market. “It can provide some more competitive quotes from some of the larger insurers who are, perhaps, going to source higher yielding assets if they believe they can get a bigger chunk of the pie. So I do see some movement potentially towards larger transactions given some activity in the market.”
On the flip side, Simmons says annuitization size hasn’t affected pricing over the last couple of years. “That might have been the case at one point, but I think nowadays the market is able to absorb all of those transactions and be very competitive with all of them.”
And transacting in a day can be easier, he notes, because there is one governance process, one decision to make, one contract to sign and one implementation.
For its part, West Fraser will continue to wait until the time is right for the next phase of its annuitization journey. “We’re ready to annuitize for the right price, but not at any price,” says Jensen. “So we’ll just wait — just like we did with the last ones — until the market makes sense to do that.”
The company is also waiting until it has a large enough population for its next purchase, she adds. “The advice we’ve always been given is that, [for] insurers, there’s a sweet spot, so it doesn’t make sense to go to the market with small chunks — look for the sweet spot.”
Yaelle Gang is editor of the Canadian Investment Review.