The Annuity Edge: Why an Annuity Company – Even a New One – May Be the Most Secure Choice for Taking on Pension Risk
If you spend much time in or around the pension sector, particularly defined benefit plans, you’ll inevitably hear the phrase, “the pension promise”. Essentially, it refers to a pension plan’s commitment to providing its members with the promised income to help them enjoy a financially secure retirement. Increasingly for many companies and plans, the best way to keep the pension promise is through an annuity solution. Of course, a central consideration with any promise is whether the person or organization that makes the promise can keep it – and that certainly applies to annuity providers.
Brookfield Annuity Company is Canada’s first, and currently only, company created to focus on providing group annuity solutions to defined benefit pension plans. We were established at the end of 2016 and are already helping organizations ¬ranging from a Global Fortune 500 firm to a small resource company – keep their promises. Among the first questions we had to answer from all these organizations was “How can we be sure you can keep the pension promise?” Another was “Why don’t you have a credit rating?”
As it turns out, the answers to these questions are related and they are connected to Brookfield Annuity’s underlying strengths and the strong foundation of Canada’s financial and life insurance sectors.
We deserve some credit
Imagine for a moment a recent university graduate: good grades, a responsible full-time job and volunteers for worthy causes. One day, she gets a lottery ticket as a gift and wins millions, which she immediately puts into the bank. So, you’d think this young woman would have a fantastic credit rating. Actually, no. This youthful paragon (who has never borrowed a cent or missed a payment) has no credit rating at all. Why? It’s not due to a lack of resources or capacity – it’s purely due to a lack of history.
We’re in a somewhat similar situation.
Brookfield Annuity has significant assets under administration and we do business with many well-known firms, but we’re a young company. Consequently, any credit rating we might receive now would reflect our lack of history more than it would our underlying creditworthiness. To get a credit rating, you must engage one of the major credit rating suppliers, who will analyze your company and provide an authoritative rating. We will do this once we’ve gotten a few more years – three, to be precise – under our belt.
In the meantime, there are a number of other ways that pension plan sponsors can gain a thorough understanding of our financial strength and capacity to fulfill our long-term obligations. This is where OSFI comes in.
An abundance of oversight
OSFI, the Office of the Superintendent of Financial Institutions, is an independent agency of the Government of Canada that reports to the Minister of Finance. It is the sole regulator of banks and the primary regulator of insurance companies, trust companies and loan companies in Canada. OSFI also regulates some pension plans. All Canadian annuity providers, including Brookfield Annuity Company, are life insurance companies (LifeCos) whose operations are overseen by OSFI.
Before Brookfield Annuity opened for business, we had to receive approval from OSFI. Since our launch, we – like all other LifeCos – have had to file a quarterly report that clearly shows our assets and liabilities. LifeCos must also provide an annual projection of what their liabilities, assets and surplus capital are going to be in five years. On top of that, as a further safety measure, all insurers must hold assets that are greater than – not just equal to – their liabilities.
As a new insurer, Brookfield Annuity has committed to hold even more surplus assets than are typical for a Canadian life insurance company. The size of that surplus will decrease over time, but our commitment is to always have more capital available than OSFI requires.**
Which means, in BAC’s case, if it ever looked like we might fall below our target level of surplus, we would have to provide OSFI with a plan showing how we would get back to that target.* Again, it wouldn’t be the case that we didn’t have enough money to meet our obligations – these steps would be triggered if OSFI felt we didn’t have enough surplus money.
The Insurance Companies Act provides a further level of security by restricting the investments of LifeCos. Among these restrictions: there are limits to the amount of equity (which comes with degree of inherent volatility) that can be held in a portfolio. At present, Brookfield Annuity does not hold any equity – our portfolio is all fixed income because this is the best match against our liabilities.
Protecting policy members
OSFI’s oversight of Canadian insurers helps make our insurance sector one of the most secure and dependable in the world. Still, Canada offers an additional level of protection to policyholders and policy members through Assuris. Established in 1990, Assuris is an industry-funded, not-for-profit organization that protects Canadian policyholders if their life insurance company should fail. Every company authorized to sell insurance policies in Canada must become a member, and that includes Brookfield Annuity Company. So, if somehow Brookfield Annuity became unable to meet its obligations (not very likely – see above), Assuris guarantees that our policy members would retain a minimum of 85% of their monthly pension benefit. Actually, if the pension benefit were $2,000 or less, the policy member would receive the full amount – the 85% formula applies only to benefits of more than $2,000 per month.
If OFSI is the brakes and safety belts, think of Assuris as the airbags: a final, failsafe that is probably never going to be used. Still, it’s there if required.
Keeping the Promise
Group annuities were created to provide DB Plan sponsors with dependable options for keeping the pension promise. The Canadian regulatory regime ensures that life insurance companies meet even more robust capital and valuation standards than pension plans, which are already quite rigorous. In practical terms, the level of security demanded of LifeCos, including the need to maintain a surplus at all times, makes them exceptionally able when it comes to mitigating risk and meeting obligations – whether the product is an individual life insurance policy or a group annuity that serves thousands.
*On January 1, 2018, OSFI is going to start replacing the current Minimum Continuing Capital and Surplus Requirements (MCCSR) with the Life Insurance Capital Adequacy Test (LICAT), a total balance sheet approach for assessing a life insurer’s risk profile and the economic environment. We’ll be tackling that subject in one of our next white papers, so be prepared to learn new acronyms!
** The way this surplus is measured will be changed when LICAT goes into effect on January 1, 2018, but the end result will be the same: OSFI will mandate that we have more capital than is needed to meet our obligations.
President and Chief Executive Officer
Brookfield Annuity Company