An update on 2015 trends in the

Canadian pension risk transfer market

ACPM webinar October 7, 2015

1

2

Hugh Kerr Vice-President and Associate General Counsel

Sun Life Financial

Heather Wolfe Managing Director, Client Relationships,

Defined Benefit Solutions Sun Life Financial

2

3

1

Focus on longevity risk

Update on market trends

How does longevity insurance work?

Case studies

2

3

4

Agenda

3

UPDATE ON MARKET TRENDS

4

Canadian group annuity market

5

1,182 1,012

1,314

748

1,362

1,054

2,218

2,460

752

0

500

1,000

1,500

2,000

2,500

3,000

2007 2008 2009 2010 2011 2012 2013 2014to June 30,

2015

Gro

up a

nnui

ty m

arke

t (in

C$

mill

ions

)

Source: LIMRA

Global risk transfer transactions

183

89

11

65

0

20

40

60

80

100

120

140

160

180

200

2007 2008 2009 2010 2011 2012 2013 2014

Tota

l bus

ines

s (in

$C

bill

ion)

Cumulative annuities and longevity insurance

U.K. annuities and longevity insurance

U.K. annuities

Canadian annuities

U.S. annuities

Source: Hymans Robertson, Lane Clark & Peacock LLP, LIMRA and Sun Life estimates and exchange rates at December 31, 2014

6

Annuity boomerang risk UPDATE

Province Annuity buy-In Annuity buy-out (ongoing plan)

Annuity buy-out (wound-up plan)

British Columbia Risk exists Full discharge Full discharge

Alberta Risk exists Full discharge1 Full discharge

Ontario Risk exists Risk exists2 Full discharge

Quebec Risk exists Risk exists3 Full discharge

Federal Risk exists Risk exists Full discharge

Boomerang risk is the potential for the pension liability to revert to the plan sponsor’s balance sheet if an insurer becomes insolvent

Notes: 1 Alberta supports the discharge of liabilities, but this is not part of the regulations yet 2 Policy W100-803 provides a workaround 3 Bill 57 proposes the removal of the annuity boomerang risk effective January 1, 2016

Industry stakeholders are advocating for change

7

Regulatory updates

• Policy on original and successor pension plans • Spin off and wind-up option can enable a full liability

discharge for ongoing plans that purchase annuity buy-outs Ontario’s Policy W100-803

• Verizon retirees argued that annuity purchase with Prudential resulted in less protection for members

• Lawsuit and subsequent appeal were dismissed Verizon lawsuit

• Effective January 1, 2016 • Removes the annuity boomerang risk for ongoing plans • Removes solvency funding requirement • Introduces new stabilization provision

Quebec’s Bill 57

8

Plan sponsors are hedging different combinations of longevity and investment risk

Long

evity

risk

Unh

edge

d H

edge

d

Investment risk (discount rate, inflation, credit default, equity)

Unhedged Hedged

Group annuities

Traditional

Longevity insurance

+ Traditional

Longevity insurance

+ Full LDI

Alternatives

Full LDI Alternatives

9

Market barriers

What we hear

Interest rates are too low

My plan is underfunded

My plan is too big for the

market

My plan has CPI indexing

10

FOCUS ON LONGEVITY RISK

11

Longevity risk created losses in the past

15.1 years

16.7 years

17.3 years

19.8 years

21.4 years

GAM71 GAM83 UP94(2000)

UP94GEN(2009)

CPMPriv(2014)

2020 2035 2050

Expected longevity (Canadian male – age 65)

6.3 years of error in life expectancy

12

Actual improvement rates have been about double the CPM-B long term improvement rate

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99

Canadian population historical mortality improvements (Females)

1990-2009 1980-2009 1960-2009 1930-2009

For age group 55 to 75, the average mortality improvement rates have been around 1.5%

Assumed long term improvement rates: CPP = 0.8% QPP = 2.1% (males) = 1.5% (females)

13

There is still a lot of room for improvement

Scientists make insulin-producing cells from stem cells to cure Type 1 diabetes (HealthlineNews, 2014)

Novartis will invest $35 million in Gamida Cell… a world leader in stem cell technologies (Wall Street Journal, August 19, 2014)

Significant resources are being devoted to extend lifespans

Alkahest inks $50B deal to see if transfusing young blood into elderly patients can treat cognitive impairments (FierceBiotech, March 4, 2015).

14

CASE STUDIES

15

Reduce the impact of interest rates

Use bonds to

buy annuities

Interest rates no longer matter

Fixed income portfolio Annuity purchase In-kind transfer

Case study: Anonymous company – 2014 transaction • Large Canadian company, winding up pension plans • Want flexibility to choose timing that works best for them • Willing to transfer their bonds to purchase annuities

16

Don’t wait to be fully funded

Case study: Anonymous company – 2014 transaction • Large Canadian company with an ongoing pension plan • Funding level triggers for annuity purchase • First triggers occur at funding levels below 100%

Annuity buy-in Full risk transfer No top-up contribution

Annuity buy-in

No top-up contribution required

17

A renowned Canadian company is taking action BCE longevity insurance transaction

$5B longevity insurance

Transfer longevity risk on $5 billion of liabilities

Comfortable managing

investment risk

Reduce pension volatility

Ensure member benefit security

Maintain assets

Committed to reducing

pension risk

18

HOW DOES LONGEVITY INSURANCE WORK?

19

Insurer

Retirees Pension plan

• Plan pays fixed monthly premiums to insurer • Insurer makes guaranteed payments to plan • Insurer covers longevity risk • Does not trigger settlement accounting or require top up • Can be combined with LDI

Fixed monthly premiums

Actual monthly pensions

Monthly pensions

Longevity insurance

20

0

20,000

40,000

60,000

80,000

100,000

120,000

2015 2025 2035 2045

Mon

thly

cas

h flo

ws

($)

Best estimate pension payments

1 – A G R E E O N B E S T E S T I M A T E P E N S I O N P A Y M E N T S

21

1 – Agree on best estimate pension payments

0

20,000

40,000

60,000

80,000

100,000

120,000

2015 2025 2035 2045

Mon

thly

cas

h flo

ws

($)

Best estimate pension payments

Fixed payments

2 – D E T E R M I N E F I X E D P A Y M E N T S P A I D B Y P L A N

Pension plan Fixed payments

Insurer

2 – Determine fixed payments paid by plan

22

3 – A C T U A L P E N S I O N P A Y M E N T S P A I D B Y I N S U R E R

0

20,000

40,000

60,000

80,000

100,000

120,000

2015 2025 2035 2045

Mon

thly

cas

h flo

ws

($)

Actual pension payments

Best estimate pension payments

Fixed payments

Pension plan Fixed payments

Insurer

Actual pension payments

Insurer pays extra pensions

3 – Actual pension payments paid by insurer

23

Source: Mercer (Canada) Limited

Longevity insurance key terms

Best estimate longevity

assumptions

Counterparty risk

management Administration

procedures

Price Conversion to annuity Termination

24

Why are Canadian plans considering longevity insurance?

First deal done

Risk is real

“It is OSFI’s view that a longevity risk hedging contract is a permissible investment provided that it is consistent with the terms of the pension plan and the plan’s Statement of Investment Policies and Procedures …” OSFI

Growing realization that this risk is material and requires specialized expertise to manage

First insurance deal in North America, and one of the largest deals ever, has been completed.

OSFI guidance

25