Is Air Canada’s move to enter annuity market the start of a new pension trend?

As Air Canada seeks approval from the Office of the Superintendent of Financial Institutions to form its own life insurance company, bringing it one step closer to the annuities market, will this move become a trend for large organizations with looming pension payouts?

In an email to Benefits Canada, a spokesperson from the airline said the move is a new approach to managing the defined benefit components of its registered pension plans, calling the creation of AC Life Insurance Co. an  “innovative and progressive approach to retirement plan management.” 

The Montreal-based airline currently doles out $725 million in annual pension payouts, which is projected to grow to more than $900 million in a decade. The plan covers 53,000 employees and carries a solvency surplus of $2.6 billion. 

Read: Air Canada looks to enter annuity market to hedge against pension payouts

“This structure was developed given our very large Canadian pension liabilities compared to the Canadian annuity market,” noted the spokesperson. “It will benefit Air Canada’s employees and pensioners by better protecting pensions and plan members and ensuring long-term sustainability of pension plans. To our knowledge, this structure will be unique in the Canadian pension industry.”

Benoit Labrosse, a partner in the asset and risk management practice at Morneau Shepell Ltd., says he speaks to a lot of organizations across Canada that are interested in purchasing annuities or looking at longevity risk transfers, but very few are thinking about entering the insurance market.

“Not that I’m aware of, anyway,” he says. “And I’m talking to organizations that have in access of $5 billion pension plans. They would be struggling the same way Air Canada would be struggling, if they were to seek to purchase annuities from insurers directly in Canada.”

Read: How Air Canada’s pension took off as Canada Post’s plan sank into deficit

Though Air Canada is correct in stating the Canadian annuity market is small compared to the size of many organization’s pension liabilities, the market is growing, with group annuity sales were up $0.6 billion in the second quarter of 2018, according to Willis Towers Watson’s latest quarterly update.

Labrosse says he doesn’t see anything slowing down the rate at which organizations are purchasing annuities in Canada. “I don’t see a trend reverting back to a more normal level of transaction,” he says. “Quite the opposite: I think it’s going to grow significantly for the next few years.”

In the case of Air Canada, the proposed move to the annuity market isn’t a question of timing or the pricing of annuities, according to the spokesperson. Generally, a pension plan is in a good position to purchase annuities when it’s financially in balance or in a surplus position, which is currently the case for the company’s pension plans.

“We have been reducing the risk of the plans for several years now and purchasing annuities is a common tool to further reduce risk. The purpose is to partially freeze this financial position by commencing to purchase annuities, but given our size, it will take several years before annuities can be purchased for all pensioners. At the same time, AC pension plans are maturing quickly, so we have to plan ahead.”

Read: Buy-ins and boomerangs: A look at the trends in Canada’s annuity market

The formation of the AC Life Insurance Co. is subject to approval from a number of regulatory bodies, including the minister of finance, following recommendations by the OSFI. “Once the required approvals are obtained, potentially in the next few months, the new structure would be gradually implemented,” wrote the spokesperson.