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Longer Life Hurts Pension Plans

Not only are Canadians getting older, they're also living longer. And while long life is usually a good thing, it has significant implications for sponsors of defined benefit pension plans, says Towers Watson. The Canadian Institute of Actuaries (CIA) has released a draft set of updated mortality tables which show the life expectancy of a 60-year-old male today has increased by 2.9 years (from 24.4 to 27.3 years) compared to pension mortality tables currently in use. The life expectancy of a 60-year-old female has increased by 2.7 years (from 26.7 years to 29.4 years). 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. Although the effect will vary from plan to plan, adoption of the proposed mortality tables and acceptance of the study's prediction of future mortality improvements could also immediately increase pension accounting liabilities by five per cent to 10 per cent for many plans, potentially impacting corporate income statements and balance sheets. Gavin Benjamin, a senior retirement consultant at Towers Watson, says "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." The implications of lengthening lifespan are not limited to sponsors of DB pension plans. Employers sponsoring defined contribution and other types of capital accumulation plans should also take note. “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."

Courtesy of Benefits and Pensions Monitor website News Alerts

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