Learn more about pension derisking from Osler's experts.

1. Longevity Risk Transfers
for Pension Plans
Douglas Rienzo
Canadian Institute of Actuaries – Pension Seminar
November 5, 2015
LEGAL 1: 36854979.1

2. Pension De-Risking
2
 Manage liabilities
 Minimize volatility
 Address affordability

3. Pension De-Risking
3
 Plan Design Options
 Amend DB formula e.g. FAE to CAE
 Close DB option e.g. DC for future service/new hires
 Shared risk or target benefit plan

4. Pension De-Risking
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 Investment strategy
 Chase return: asset allocation / alternative
investments
 Liability-driven investing
 Match bond duration to expected liability duration
 Does not mitigate longevity risks

5. Pension De-Risking
5
 Longevity risk transfer structures
 Lump sum transfers
 Buy-in annuity
 Buy-out annuity
 Longevity swap/insurance contract
 Other
 Plan wind-up
 Conversion into DC benefits

6. Emergence of Longevity Risk
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How did we get here?
 Long term gradual changes – lower birth rates,
lower mortality rates because of better medical
care and preventative health measures
 This has increased both the absolute and relative
size of the population over 65
 This trend is expected to continue – but its
duration and rate of improvement is uncertain

7. Pension Plans
7
Pension plan sponsors look at de-risking for several
compelling reasons:
 Investment volatility – de-risking reduces overall
volatility
 Each year of increase in life expectancy adds to the
pension liability (UK experience: 3.5%)
 Reduces need for unexpected additional funding
 Balance sheet volatility is reduced making the
business more attractive to investors

8. Pension Buy-In Structure
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Pension Plan Pensioners
Insurer
Single
Premium
Paid by Plan
(Transfer of
Assets)
Annuity
Payments by
Insurer equal to
Actual Benefit
Payments
Plan Pays Actual Benefit
Payments

9. Longevity Insurance Structure
9
Pension Plan Pensioners
Life Insurer
Plan Pays Fixed
Periodic
Premiums Equal to
Expected Benefit
Payments and
Fees
Insurer Pays Floating
Periodic Annuity
Payments equal to Actual
Benefit Payments
Plan Pays Actual Benefit
Payments

10. Longevity Insurance
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 The pension plan pays a series of amounts to the insurer as
premiums – fixed at the outset
 The fixed amounts payable by the pension plan are equal to
expected pension payments, including fees, to actual plan
participants - based on expected longevity of plan participants
 The insurer pays floating amounts periodically as annuity payments
equal to the pensions actually payable – this makes it an indemnity
based arrangement that only an insurer can enter into
 The fixed amounts payable by the pension plan are based on
expected pension payments, including fees, and are fixed at the
outset
 No basis risk – the floating annuity payments by the insurer are
based on actual pension benefits payable to plan participants – and
does not require regular monitoring of population longevity
 Only the longevity risk is transferred
 The investment risk (or opportunity) remains with the pension plan

11. Questions?