Statutory Discharge – A Step Forward in Pension Risk Transfer
The dramatic reduction in risk for pension plan members and pension plan sponsors is a defining feature of group annuities, whether the arrangement is a buy-in or a buy-out. In July 2018, the government of Ontario further enhanced the value of buy-out transactions covering Ontario-based pension plan members through new statutory discharge provisions in the Ontario Pension Benefits Act (PBA). After meeting certain conditions, single-employer pension plans that purchase a group annuity – one that fulfills specific requirements to deliver benefits for former or retired members – will receive a full statutory discharge from the obligation to pay a pension to those members.
These conditions also include notifying all former and retired members covered by the annuity purchase. Additionally, plan administrators have to make specific regulatory filings to secure the discharge. Finally, there are solvency requirements that the plan administrator has to meet on completing the annuity purchase. Meeting these solvency requirements may involve a significant investment. For this reason, some companies start with an annuity buy-in, which does not have the same conditions, and then move to a buy-out over time. On this timetable, once the buy-out is complete, the sponsor, having met all the requirements, will still be eligible for the statutory discharge.
The concept of “statutory discharge” in relation to annuity buy-outs is already established in the United Kingdom and the United States, where group annuities have a longer history. With the implementation of the new PBA provisions, Ontario joins British Columbia and Quebec in explicitly allowing pension plan sponsors that meet certain conditions to eliminate “boomerang risk.”
Boomerangs Should Return. Risk Shouldn’t.
In the pension world, the term “boomerang risk” is used to describe an extraordinarily unlikely scenario: after a buy-out, an insurer becomes insolvent, and pension members return to the original plan sponsor, the employer, with the expectation that the employer will pick up the cost of any shortfall in benefits. As noted, “statutory discharge” puts an end to this concern. The elimination of “boomerang risk” may help companies that are looking to clear or reduce pension obligations on their books, which can be a crucial step in moving towards a merger or working to secure funding for any purpose.
The willingness of three of the country’s largest provinces to embrace the concept of “statutory discharge” indicates that legislators and policymakers increasingly recognize the valuable contribution that group annuities are making to ensure retirement security for Canadians. It is also a real vote of confidence in Canada’s annuity and insurance system. So, even though not all provinces explicitly offer full discharge, we believe that this confidence should be an important consideration for any organization looking to de-risk through an annuity, regardless of provincial jurisdiction.
Built to Last – The Benefit of Strong Regulation
Every Canadian annuity provider, including Brookfield Annuity Company, is a life insurance company. As such, we must comply with the stringent rules and requirements that govern Canada’s insurance industry and make our system one of the most reliable in the world. Brookfield Annuity is supervised by regulators in every province and territory and nationally by the Office of the Superintendent of Financial Institutions (OSFI).
To keep our licence to operate, we have to continually demonstrate our ability to meet our obligations to our annuity policy members. Consequently, we report our assets, liabilities and capital levels to OSFI every quarter.*
Canadian life insurance companies are also all backstopped by ASSURIS, an industry-funded organization that protects Canadian policyholders, including annuitants. In the exceedingly unlikely event that Brookfield Annuity or one of its peers could not fulfill its obligations, ASSURIS would be there, guaranteeing that policy members would retain at least 85% of their benefits, and in many cases they would receive the full 100%. The system is set up to make sure that the risk does not impact pension plan sponsors, whether or not they have received a statutory discharge. Instead of a stray boomerang risk surprising sponsors, there would be a cleanly executed spiral straight into the steady hands of ASSURIS.
All of these elements combine to mitigate and minimize risk for every type of group annuity in every province and territory.
* For more information about the regulations and structures that support Brookfield Annuity in reducing risk, see “The Annuity Edge: Why an Annuity Company – Even a New One – May Be the Most Secure Choice for Taking on Pension Risk” and “LICAT – An Evolution in Risk Assessment and Risk Management.”
Chief Compliance Officer
Brookfield Annuity Company