Changes to Canadians’ life expectancy could have small effect on pension liabilities

Life expectancy at age 65 has marginally increased for Canadian men while remaining stable for Canadian women, according to new data from Statistics Canada.

It found life expectancy for Canadian men at age 65 increased to 19.4 years in 2018, up from 19.3 in 2017. In comparison, for Canadian women at age 65, life expectancy remained the same, at 22.1 years.

Bob Howard, a past president of the Canadian Institute of Actuaries, says the numbers are in line with his expectations. He recently completed a report for the CIA addressing whether it was necessary to redo the 2017 mortality improvement scale, which is shared with pension actuaries. The scale looks at a complex table of life expectancy for all ages, with each reporting different changes.

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“I concluded that there is good reason to take a look at [the scale], . . . primarily with respect to the older ages and their risk to pension plans,” says Howard. “The mortality improvement we’re seeing there is different than what we saw when we constructed the other scale; the improvement rates are not just different from what we expected, they’re also varied by age, and they will have an impact on pension values because of that. It won’t be enormous, but it won’t be tiny either.”

Based on the balancing out of different age groups’ life expectancies, pension plans could see a decrease in their liabilities in the range of one per cent, he says.

Canadians who are currently receiving their pensions have experienced a one to three per cent increase in life expectancy, notes Howard, with a slightly higher increase for men compared to women. “The opposite was true for quite a length of time. And now we’re seeing males, in effect, catching up on the leading position females have on longevity. So the female rates are more in the range of one to two per cent, and males are more in the range of one to three per cent.”

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Fred Vettese, the former chief actuary at Morneau Shepell Ltd., says pension plans are unlikely to see much more substantial changes to life expectancies. “The reason why mortality has been going down generally over the past century [is, in] the first half of the 20th century, it happened because of improvements in infant mortality, mainly. And then in the second half of the century, it happened mainly because of improvements in life expectancy for older people, people in their 70s and 80s.

“I think most of the low hanging fruits happened already. . . . I don’t think we’ll see any kind of dramatic changes in terms of mortality for people at advanced ages.”

As well, he notes, life expectancies aren’t the only factor affecting pension liabilities. “Mortality is not as big of a factor as interest rates. At the same time as we’re seeing stagnating mortality — which means lower pension liabilities — we’re also seeing interest rates and investment returns staying low for a long time to come. And slowly, we’re starting to ratchet down our expectations for those investment returns in the future. That has a bigger impact in terms of raising liabilities for pension plans.”

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