Loblaw buys $350M in annuities for inflation-linked DB obligations

Loblaw Companies Ltd. has purchased annuities from Sun Life and BMO Insurance to reduce risk from its inflation-linked defined benefit pension plans.

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The transaction, which amounted to about $350 million, is one of the largest completed in Canada, said Marco Dickner, retirement risk management leader at Willis Towers Watson. The firm advised Loblaw on finding the solution.

“In consultation with Willis Towers Watson, we found a winning combination of conditions that enabled us to reduce the financial risks from our defined benefit pension plans at an attractive price in line with the company’s financial objectives,” said John Poos, group head of pensions and benefits at Loblaw.

Under an annuity buyout, an insurance company assumes responsibility for making pension payments to plan members in exchange for a premium. The Loblaw deal involved inflation-linked pension benefits, which is notable given the perception that annuities in that situation are more expensive and not readily available from insurers. “The insurers’ appetite for inflation risk has been limited because . . . it’s a tough one to hedge,” says Dickner. “The insurance business is a spread risk, so they take on some risk but then they offset it through investments in other parts of their business.”

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When it comes to getting over the hurdle for inflation-linked pension obligations, Dickner emphasizes the role of a competitive bidding process.

“What we do with plan sponsors, we meet with them, we make sure they understand the strategy and then we bring them to market. So we send [requests for proposals] to all of the market players to get quotations. Ideally, we want to secure a financially good transaction for our clients, so as many bidders as possible, and then that’s one of the things that we see the market moving [towards]. There’s more and more insurers willing to transact at an affordable price for indexed annuities. And that’s why, for this transaction, there are two insurers involved. We had a very competitive bidding process.”

The announcement comes as many industry participants expect the annuity market to continue to grow. ”There are many plans in Canada that provide inflation-linked pensions, and we believe there are significant opportunities for these plans to transfer risk at an affordable cost,” said Brent Simmons, senior managing director for defined benefit solutions at Sun Life Financial.

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The market has also been changing, says Dickner. “One of the interesting trends that we see, if we look at last year, two thirds of the transactions happen for ongoing plans,” he says.

“If we go prior to 2013, annuities were mainly purchased for plans that were terminated. Now what’s happened is that plan sponsors are using annuities as part of their ongoing plan as a risk management tool. . . . Annuities are being seen as an alternative investment.”