It’s official — not only are Canadians getting older, more of them are also living longer.
In fact, the life expectancy of a 60-year-old male today has increased by 2.9 years (from 24.4 to 27.3 years), finds a Canadian Institute of Actuaries (CIA) study. The life expectancy of a 60-year-old female has increased by 2.7 years (from 26.7 years to 29.4 years).
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While long life is usually a good thing, it has significant implications for sponsors of defined benefit (DB) pension plans. As life expectancy increases, plan sponsors will need to cover higher numbers of pensioners for longer periods of time, increasing pension liabilities and requiring larger pension contributions.
“Just as sponsors were beginning to see a reduction in their pension deficits due to improvements in the global equity markets and rising interest rates this year, the increase in life expectancy suggested by the CIA study could reverse much of this gain,” says Gavin Benjamin, a senior retirement consultant at Towers Watson.
However, plan sponsors can start preparing for the implications of the study. Benjamin suggests, “This may include calculating the effect of using the proposed mortality tables to value their pension liabilities, and conducting a mortality experience study for their plans. Sponsors may also wish to explore available options to mitigate the long-term risk posed by increasing life expectancy.”
Employers sponsoring defined contribution (DC) and other types of capital accumulation plans should also take note. In a DC plan, the employer provides a fixed contribution to a pension plan over the career of the employee. The plan member is required to manage the investments and ultimate pot of money from which to draw retirement funds or to purchase an annuity for their lifetime.
“Increasing life expectancy could mean that employees with a DC or capital accumulation plan will need to save more in order to afford retirement,” says Michelle Loder, Towers Watson’s Canadian DC Leader. “This could result in employees delaying their retirement until they have accumulated sufficient retirement savings, possibly challenging employers’ ability to manage career progression and workforce objectives.”
To better adapt to changing workforce demographics, DC plan sponsors may want to consider evaluating how prepared their workforce is for a financially fit retirement.
“The increase in life expectancy can serve as a reminder of the need to educate employees and provide them with decision support tools to help them understand the risk of outliving their pension savings, and the options and actions they can take to manage this risk,” adds Loder.
Public vs. private sector
In a potential twist for public sector plan sponsors, the study also finds generally higher overall life expectancy for workers in the public sector compared to the private sector.
“While this may be good news for public sector employees and pensioners who are largely covered by DB plans, there will be financial implications to consider. However, policy makers will need to balance those considerations against the effective recruitment and retention benefits that DB pensions can provide,” says Benjamin.