By Karen Johnson
TORONTO--With persistent low interest rates inflicting serious
collateral damage on savers, pension plans and life insurers,
policy makers should use other levers to help manage their impact,
a top Canadian life insurance executive said Wednesday.
Speaking at an economics conference in Toronto, Sun Life
Financial (SLF) President and CEO Dean Connor said governments in
Canada and abroad should shift more of their debt issuance to the
long end of the curve.
Heavier supply of 30-year bonds would likely drive down prices
and drive up yields, giving a boost to retirement savers, pension
plans and life insurance companies, he said.
"If you are a government, and you can fix 30-year borrowing
costs at 2.3% in Canada or 2.8% in the United States, or 3.1% in
the U.K., that strikes us as a good trade, in any environment,
whether it's a return to normal growth, or even a return to
inflation," Mr. Connor said.
Canadian Finance Minister Jim Flaherty said last week that the
government would increase the amount of issuance in the 30-year
sector in order to lock in low interest rates.
Sun Life's Mr. Connor offered details on how the low-rate
investment environment is buffeting retirees, who typically depend
on low-risk, government bonds to finance their day-to-day
expenses.
Five years ago, a fixed-income investment portfolio was earning
about an 8% return. That means to generate an income of $20,000 a
year, from age 65, an investor would need to have $220,000 set
aside.
Today, with returns of about 5%, an investor would need about
30% more socked away -- or $280,000 -- for an annual income of
$20,000.
"What do you do with that as a retiree? You either cut your
spending, you delay your retirement, or you take more risks. None
of those are very good answers," he said.
Low interest rates are challenging for life insurers as
well.
"We try to match as much as we can but we have very long-dated
liabilities, and we in fact cannot find fixed-income instruments
that go out far enough to match off the full tail of liabilities,"
Mr. Connor said.
Among pension plans sponsors, the same is true. Mr. Connor said
he has seen a big trend to de-risking defined benefit plans, a
trend that began in the U.K., moved to Europe and is now spreading
to North America.
He sees an increasing trend toward annuities, as human longevity
extends, making them financially more prudent than traditional
benefit plans.
General Motors is part of the trend, he said, having announced
in the U.S. a $26 billion deal to buy annuities, to diffuse the
riskiness of defined benefit plans.
"We think that's going to be a tipping point to have more
defined benefit plans piling in," he said.
Write to Karen Johnson at karen.johnson@dowjones.com