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Pension funds : three tracks to get rid of the longevity risk

by

Aurélia Morvan

February 27, 2019 09:30

With the increase of the life expectancy of Canadians, pension plans, defined benefit plans may not follow. This is the famous longevity risk, including pension funds looking to divest.

On the occasion of the presentation of the outlook 2019 of Mercer ‘s pension, F. Hubert Tremblay, senior advisor, talked about three trends that are developing in the field of management of longevity risk. Here they are.

Insurance longevity

An employer can have recourse to the longevity swaps. This is an action by which he transfers the longevity risk, which weighs on its pension plan to an insurer. The employer paid premiums to the insurer. In return, the insurer assumes the benefits of retirees who live beyond a threshold set in advance between the company and the insurance.

In Canada to date, the largest transaction of this type was concluded in 2015. The Sun Life Financial and a syndicate of reinsurers formed of RGA Canada and SCOR Global Life had decided to ensure the longevity risk incurred by Bell Canada.

Transferring the commuted value to another plan

Transfer to a jointly sponsored pension plan

In this case, a large pension plan aspires to more small plans. This is what happened in the framework of the agreement, in Ontario, between Postmedia and the Regime of the CAAT. The latter has absorbed the six pension plans the group’s defined benefit press.

Transfer to a pension plan by funding salary (RRFS)

Here, the employer transfers the management of the pension plan of the employees to get together in a group. In a framework for a union, the union could be responsible for this management. In Quebec, a RRFS community groups and women has been created in 2008, with the support of the service aux collectivités ofUQAM.

Transfer to a pension plan target benefit (CHRS)

It is a combination between the defined benefit plan and the defined contribution plan. Employer and employee contributions, or how to calculate them, are determined in advance. However, the amount of the pension may be adjusted according to the financial capacity of the plan. For the moment, in Quebec, this type of plan is only allowed for certain companies in the pulp and papers such as Resolute forest Products.

The purchase of annuities synthetic

In December 2018, Microsoft and BlackRock have teamed up to develop a concept, still in its infancy. The two american multinationals, specialized in computer science and the other in asset management, are scrambling to create a digital platform that will help Americans to save and invest for their retirement.

This platform, which could be launched in 2019, will be offered by the employers. Its aim will be to offer employees the opportunity to purchase products to guaranteed income through their retirement plan. In the clear, rather than buying an annuity classic, the employees buy an annuity-synthetic “. That is to say that they will buy financial products that offer a guaranteed income in retirement, thereby simulating the behavior of a normal pension. Term, Microsoft and BlackRock hope to extend this technology to other countries.

This type of tool facilitating the investment of the employees could greatly reduce the financial risks facing the employer in a defined contribution plan.

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