Canadian Bank Note de-risks pension plan with longevity agreement

Canadian Bank Note Company Ltd. has entered into a longevity agreement with the Canada Life Assurance Co., transferring $35 million of longevity risk associated with its defined benefit pension plan.

The company, which designs and manufactures anti-counterfeit documents, has about 200 retirees and 100 active members in the plan. In 2012, its pension committee learned increased life expectancy was going to raise the plan’s liabilities by about five per cent, says Bradley Baker, the company’s senior actuary.

“It was very much in line with a trend [of Canadians living longer] that we’ve seen over the past few decades,” he says. “When plan members live longer then the actuarial tables predict, the effect on liabilities can be pretty severe, and in our pension plan’s experience, we didn’t have a time period where our members have lived, on average, shorter lives than a previous generation. So longevity has been constantly increasing and it’s never gone backward.”

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While Canadian Bank Note was aware of the longevity risk, it wanted to continue to manage its own pension plan and investments and wasn’t looking to purchase annuities, according to Baker. “As a plan sponsor, we didn’t want to windup the pension plan and we were comfortable managing the other risks such as investment risk.”

The company started to look for opportunities to offload its longevity risk, says Baker, adding that while everyone was on board with the decision, it took years to find an insurer. “I approached . . . insurance companies initially and every single one of them told me no,” he says. “The biggest challenge for us was our [small] size. . . . It took quite a bit of discussions and arm twisting.”

In late October, the company secured a longevity agreement with Canada Life that took more than a year to arrange, according to Neil Duffy, vice-president for pension risk transfer at Canada Life.

Under the agreement, Canadian Bank Note maintains full responsibility for monthly pension payments, but Canada Life will be reimbursing the plan if its members live beyond life expectancy, says Duffy. In return, Canada Life will receive a stream of fixed payments from Canadian Bank Note.

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While longevity agreements have been popular in Britain, it has been a relatively scarce phenomenon in North America, says Duffy. In fact, before the agreement with Canadian Bank Note, there had only been one other longevity agreement with a large plan sponsor in Canada, he adds.

Longevity insurance for small plan sponsors is rare because the transactions are usually complex, says Duffy. “I think there haven’t been many of these . . . because I don’t think plan sponsors think it could have been done for a small plan.

“The main things that complicate [the agreements] are the collateral. In a larger deal, collateral protects each side in case something goes wrong. You want to make sure that each party is protected for the payments that are due. So all of those things lead to it being hard to do a transaction, and it’s usually only worthwhile to do [one] if it’s very large in nature.”

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But in Canadian Bank Note’s case, Duffy says Canada Life was able to tailor the agreement and simplify the collateral, tracking and reporting obligations. “I would just say it’s a lot more simplified than the larger deals, and we would look at it plan by plan,” he says, suggesting the agreement shows it’s possible for other small plan sponsors to offload only their longevity risk.

“It means they can have an option now if they have a concern . . .,” says Duffy. “People have been living longer lives, and that’s great news to everyone, but if you’re a pension plan sponsor, you’re thinking about that and saying, ‘Do I have the appetite to take that risk anymore?'”