August 7, 2013

New proposed mortality tables issued by the Canadian Institute of Actuaries last week show that for a woman aged 60, life expectancy has increased by 2.7 years to 29.4 years, compared with that in the mortality tables now in use.

For men at 60, life expectancy had increased by 2.9 years to 27.3 years.

Consultancy Towers Watson said the new tables carried significant implications for sponsors of defined benefit (DB) pension plans, which typically pay a pre-determined pension for the life of the retiree. [EXPAND Read more]

As life expectancy increases, plan sponsors would need to cover more pensioners and for longer periods, increasing their liabilities and so in turn requiring them to take in higher pension contributions.

Adoption of the proposed mortality tables by schemes could immediately increase pension accounting liabilities by 5% to 10% for many plans, potentially affecting companies’ income statements and balance sheets.

Towers Watson senior retirement consultant Gavin Benjamin said: ‘This study highlights the risk that increasing life expectancy can pose for DB plan sponsors.

‘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 could reverse much of this gain.’

Longer lifespans also carried risks for sponsors of defined contribution (DC) plans, Towers Watson warned, as members would need to save more to see them through a longer period of retirement.

Michelle Loder, the consultancy’s Canadian defined contribution leader said: ‘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.’

Providers of public sector pension plans also face the challenge of life expectancy growing even longer for employees in this field than in the private sector.

Benjamin said: ‘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.’ [/EXPAND]