Question and Answer document - The BCE-Sun Life Agreement
On March 3rd, 2015, BCE and Sun Life announced an agreement to transfer the longevity risk associated with $5 billion of Bell’s defined benefit (DB) pension plan liability to Sun Life. (Longevity risk arises from increased pension plan costs when pensioners live longer than expected.). Under the new longevity insurance agreement, the Bell Canada pension plan pays monthly premiums to Sun Life and, in exchange, Sun Life makes monthly pension payments into the plan for the lifetime of existing DB pensioners (~40 years). The net difference between the monthly payments made by both parties is relatively small. BCE maintains full responsibility for the Bell pension plan and related payments to pensioners. Notably, the Bell/Sun Life longevity insurance agreement doesn’t change anything for Bell’s DB pensioners who will continue to receive the same pension payments each month from Bell.
Questions and Answers:
Q. What is the nature of the Bell/Sun Life longevity insurance agreement?
- Pension plans and insurance companies face opposite risks depending on how long pensioners and insurance clients live relative to expectations. That is, pension plans face higher costs if pensioners live longer than expected (longevity risk) and insurance companies face higher costs if the clients they insure die sooner than expected (mortality risk)
- What the Bell pension plan and Sun Life longevity insurance agreement does is neutralize these types of risk for both parties:
- For example, if pensioners live longer than anticipated, Sun Life compensates the Bell pension fund for the additional costs incurred (relative to expectations re. longevity agreed to by both parties at the outset)
- Similarly, if pensioners die sooner than anticipated, the Bell pension plan compensates Sun Life for costs incurred earlier than anticipated (relative to agreed-to expectations at the outset)
- The only money that actually changes hands between the two parties over the course of the 40-year agreement is the difference between the predicted and actual pension payments, an amount that is relatively small
- Essentially, Bell is insuring $5 billion (in current dollars) – or roughly half – of the pension plan liability associated with its defined benefit pensioners against longevity risk over the next 40 years
Q. Which pensioners are covered by the agreement?
- Pensioners are not directly covered, as this is an investment of the plan
- The agreement covers roughly half of the current liability of Bell Canada’s DB pensioners
- The longevity risk associated with the other half of current DB pensioners, continues to reside with Bell
- This insurance does not cover the BCE, Bell Aliant, and Telebec pension plans, nor does it have any impact on the Bell Canada Defined Contribution plan
Q. What impact will the agreement have on pensioners?
- The agreement is transparent from a pensioner’s perspective, i.e., nothing changes with respect to the pensions and benefits they receive as a result of the agreement
- All pensioners’ total pension, whether or not they are covered by the agreement, will continue to be paid from the Bell pension plan, each month, as they are today
Q. What impact, if any, will the agreement have on Bell’s pension plan investment strategy?
- Like other pension plan sponsors around the world, Bell has been following a strategic plan for the past several years to reduce the overall risks associated with its DB pension plan liability (e.g., financial risk, discount rate risk)
- With this agreement, Bell is now also addressing roughly half of the longevity risk the pension plan faces relative to all current defined benefit pensioners
- The agreement doesn’t trigger any meaningful change to the current investment strategy or amounts of the Bell pension plan
- Bell will continue to invest pension plan assets in accordance with the Bell pension plan investment policy
Q. Why did Bell enter this agreement with Sun Life? Why now?
- The main benefit for the Bell pension plan resulting from the agreement is a reduction in longevity risk and related cost volatility over time. This adds an extra layer of financial protection for the pension promise
- The agreement is one more component of Bell’s long-term strategy to reduce various risks related to its defined benefit pension plan liability and there were good market opportunities to do so at this time
Q. Do Bell Canada pensioners face higher risk as a result of the agreement, for example, as a result of possible Sun Life insolvency?
- Because payments are exchanged between the Bell pension plan and Sun Life on a monthly basis, and the net difference is relatively small as noted above, the risk to the Bell pension plan is greatly reduced in the event of a Sun Life insolvency
- Sun Life is also subject to Insurance Law and is overseen by the Office of the Superintendent for Financial Institutions (OSFI) and is required to maintain sufficient reserves
- Insurance contracts include credit security clauses to protect involved parties from negative financial impacts
Q. Does the fact that Sun Life will reinsure the longevity risk with two other companies mean increased risk for Bell and pensioners?
- No. It is normal practice – and simply good governance - for insurance companies to re-insure with other companies in order to hedge their own risks
- It doesn’t open pensioners up to additional risk of bankruptcy and could, in effect, mean less risk for pensioners
Q. Where can pensioners get more information about the agreement?
- A BCE representative will attend the BPG Annual General Meetings this Spring to explain details of the agreement and answer questions from pensioners
- As well, pensioners can contact the call centre at 1-888-400-0661 with any questions they may have regarding the agreement