Longevity risk hedging is becoming increasingly common for pension plans which have seen a significant rise in liabilities over the past decade as a result of changes in longevity assumptions and interest rate levels. The Office of the Superintendent of Financial Institutions Canada (OSFI) recently published a draft policy advisory on the key considerations for pension plan administrators considering longevity risk hedging contracts.
The draft policy advisory outlines various longevity risk hedging strategies, the risks associated with longevity risk hedging contracts, and OSFI’s expectations of plan administrators who are considering entering into a longevity risk hedging contract. While there is no requirement to obtain prior approval from OSFI, the plan administrator should ensure the proposed contract complies with the terms of the pension plan and its Statement of Investment Policies and Procedures, the Pension Benefits Standards Act, 1985 and its Regulations, and that the decision-making process is well documented.
OSFI notes that the decision-making process should involve individuals with experience in the longevity risk hedging market as well as consideration of the factors outlined in OFSI’s Guideline on Derivatives Best Practices for pension plans.
OSFI is soliciting comments on the draft policy until December 6, 2013.