Canadian pensions overestimating longevity exposure: Club Vita

Some defined benefit (DB) pension plans in Canada are overestimating their longevity exposure, as longevity is seen to be lower than anticipated for Canadian pensioners, according to new data from Club Vita’s Canada division.

The Canadian division of specialist longevity risk information provider Club Vita, Club Vita Canada – which is the first dedicated longevity data firm for Canadian pension plans – has conducted new research that shows certain DB plans are overestimating their longevity liabilities, which could be costing DB plan sponsors.

“Based on our data, some DB plans are overestimating how long their members are currently living and are therefore taking an overly conservative approach to funding their liabilities.

“Correcting that overestimation could reduce actuarial reserves by as much as 6% – improving Canadian pension funds’ and their plan sponsors’ balance sheets just by using more accurate, granular and up-to-date longevity assumptions,” said Ian Edelist, Chief Executive Officer (CEO) of Club Vita Canada.

The firm’s UK division highlighted a similar issue with the UK longevity market earlier this year, stating that pension fund longevity risk in the region is over-valued, resulting in a potential for more than £25 billion to be wiped off the collective deficit of UK DB plans via the use of more accurate and up-to-date longevity data.

And the message is a similar one for some Canadian pension plans, with Club Vita Canada announcing that following its first annual longevity study through the creation of its VitaBank pool of longevity data in Canada, longevity exposure in the region is overestimated.

VitaBank tracks more than 500,000 Canadian pensioners from more than 40 pension plans, and includes fully cleaned and validated data up to 2014. So an improvement on the widely used Canadian Pensioners’ Mortality (CPM) study, which relies on data up to 2008, says Club Vita Canada.

According to the new data male pensioners in Canada are living roughly one-and-a-half years less than expected, while female pensioners are living approximately six-months less than expected, from the age of 65.

“Naturally, the ultimate cost of a pension plan will be determined by how long its members actually live. But assumptions made today really do matter for such long-duration commitments.

“Club Vita’s data gives DB plan sponsors the tools they need to evaluate their willingness to maintain their longevity risk or offload that risk to insurers,” said Douglas Anderson, founder of Club Vita UK.

Insurance and reinsurance broker Aon’s retirement and health advisory unit, Aon Hewitt, highlighted recently that there’s been a sooner than anticipated reduction in mortality improvement rates in the UK, and it could be that this is a global issue impacting pension plans and their sponsors in numerous parts of the world.

Canada isn’t a prominent region for longevity swap transactions but it is for reinsurance protection and, the new research suggests that some Canadian DB plans could be purchasing re/insurance cover that simply isn’t needed, adding additional costs throughout the value chain.

Furthermore, with longevity liabilities seemingly dropping in the region it could be that the need for longevity reinsurance protection, in any form, isn’t needed for some DB pension plans in Canada, at least at current levels, and at this time.

Artemis discussed last year how divergent mortality rate improvements create difficulties with longevity risk transfer, and in particular the establishment of a market-based approach. And new research such as this further supports the need for continued assessment and studies into longevity exposures across the world.

Interestingly, Dutch insurance, pensions and investments firm, Delta Lloyd, recently reported a big miss on solvency, as reported by RBC Capital Markets, which the firm attributes to its own longevity experience of people living longer than expected.

So while the trend in the U.S., the UK, Canada and elsewhere shows a reduction in life expectancy, Delta Lloyd clearly hasn’t experienced this, further highlighting the complexity and challenges with assessing mortality rates across the world and the impacts inadequate data can have on balance sheets.

Read about many historical longevity swap and reinsurance transactions in our Longevity Risk Transfer Deal Directory.