The pension downside of living longer

Canadians are living longer than ever before. Most of us would consider that good news. But longer lives could pose new funding risks for many pension plans and their members.

Lifespans and pension plans

10 years ago
Duration 3:55
Canadians are living longer than ever, but our pension plans may have trouble keeping up

Canadians are living longer than ever before. Most of us would consider that good news. But longer lives could pose new funding risks for many pension plans and their members.

The Canadian Institute of Actuaries has just released a new draft set of mortality tables that suggests that the average Canadian woman at age 60 can now look forward to another 29.4 years of life — an increase of 2.7 years over the old mortality tables. The average 60-year-old man can now expect an additional 2.9 years of life — up to an extra 27.3 years.

According to Towers Watson, a major pension consulting firm, that creates a potential problem for the sponsors of defined benefit pension plans, which guarantee predetermined pension benefits for their members.

If their plan members are now living longer, as the new mortality study suggests, then pension accounting liabilities could grow, forcing existing members to come up with larger pension contributions.

Towers Watson estimates that if the proposed new mortality tables are widely adopted, pension accounting liabilities for many plans could jump "immediately' by five to 10 per cent.

"This study highlights the risk that increasing life expectancy can pose for [defined benefit] plan sponsors," said Gavin Benjamin, a senior retirement consultant at Towers Watson.

"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 [Canadian Institute of Actuaries] study could reverse much of this gain."

Defined contribution plans also affected

It's not just defined benefit plans that are affected by longer lifespans, Towers Watson warns. Employees who are members of defined contribution (DC) pension plans may need to save more or work longer if they expect to live an extra two or three years more. 

Life annuity payouts, for instance, depend on prevailing long-term interest rates, age, gender, as well as longevity expectations. Longer expected lives mean a smaller monthly payout, all other things being equal.

The actuarial study also found that workers in the public sector generally enjoyed a higher overall life expectancy than workers in the private sector.

"While this may be good news for public sector employees and pensioners who are largely covered by [defined benefit] plans, there will be financial implications to consider," said Benjamin.