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Why Small Plan Sponsors Should Consider Transferring Their Pension Risks


The costs of sponsoring a defined benefit pension plan are significant and administration is becoming increasingly complex and time-consuming.

Larger plans with assets in excess of $1 billion benefit from economies of scale and the ability to negotiate lower fees. Consequently, their all-in annual operating costs can be as low as 30–40 basis points of plan assets. Sponsors of smaller plans are not as fortunate. Typically, they face higher operating costs on a relative basis, which act to reduce a smaller plan’s investment returns. In turn, that increases the likelihood that plan assets will not be sufficient to meet liabilities.

Another dynamic at play is that a small-plan sponsor with a disproportionately large pension liability on its balance sheet can face greater financial reporting requirements and more cash funding volatility than industry peers unburdened by similar obligations.

Smaller-plan sponsors (plans under $30 million) should consider either an annuity buy-in or annuity buy-out, which transfers the risks associated with paying pensions to the annuity provider, an insurance company. After the annuity purchase, the insurance company, rather than the plan sponsor, assumes the risk of members living longer than expected or investment returns being lower than anticipated. In a buy-out, the insurance company also becomes responsible for ongoing payment administration, annual tax reporting and delivery of annual pension statements to all members receiving a pension. Additionally, buy-outs can provide another source of savings, as there are no Pension Benefits Guarantee Fund fees or assessments for Ontario plan sponsors on liabilities covered under a buy-out annuity.

By transferring both liability and administrative costs to an insurer, a small-plan sponsor is better positioned to direct resources to its primary business. In the current low interest rate environment, it’s also possible that the quoted premium under a competitively priced group annuity could be less than the solvency liability assessed for the pensioners under the pension plan. Brookfield Annuity is ready to work with smaller plans to help manage their pension risk. If you are interested in exploring this further, we invite you to call us so we can answer your questions and help you further understand the process and benefits of transferring pension risk.

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