Canadian pension plan longevity rises as mortality expectations drop

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The mortality expectations of Canadian pension plans are set to be amended after a study by the Office of the Chief Actuary (OCA) showed that mortality rates are on the decline, leading to increases in life expectancy and longevity risk assumptions.

The study found that all pension plan cohort groups have experienced longevity improvements and that these improvements seem to have accelerated in recent years.

The net result of such improvements is that pension plans will pay out for retirees for longer than anticipated, resulting in growing liabilities due to longevity risk exposure.

The study found that for retirees the average life expectancy at age 65 over the last two decades increased by 2.5 years, reaching 20.5 years in 2013.

Typically, the study found, those with higher value pensions experience the greatest longevity improvement, suggesting that the highest-value pensioners are the ones that pension plans will have to budget the most for. However, longevity increases have been seen across all cohorts.

Survivor beneficiaries of pension plans have also seen longevity increases, albeit at a slightly lower level of 19.5 years at 65 years of age in 2013.

The fact that the entire pension population has been experiencing mortality improvements suggests that Canadian pension plans will need to budget significantly more to offset this longevity risk. The use of insurance, reinsurance and instruments such as longevity swaps and hedging is likely to be a feature.

The first Canadian pension plan to offload its longevity risk to insurance and reinsurance markets was the Bell Canada Pension Plan. Earlier this year it entered into a $5 billion longevity insurance transaction with Sun Life Financial Inc., who has been supported by reinsurance capacity from SCOR Global Life and RGA Life Reinsurance Company of Canada.

The study from the Office of the Chief Actuary will likely stimulate Canadian pension plans to look more closely at their current mortality assumptions and to recalculate their potential longevity risk liabilities. Once that work has been undertaken it is possible that an uptick in longevity insurance and reinsurance transactions may be seen.

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