Longevity risks affect all plan sponsors

Canadians are living longer than ever—a fact confirmed in updated mortality tables recently released by the Canadian Institute of Actuaries. This trend threatens sponsors of both DB and DC plans.

The updated mortality figures show that the life expectancy of a 60-year-old Canadian male has increased by 2.9 years—from 24.4 to 27.3 years—compared with figures in previous pension mortality tables. The life expectancy of a 60-year-old woman has increased by 2.7 years, from 26.7 to 29.4 years.

While longer lives are good news for individuals, they pose risks for DB plan sponsors. The first risk associated with the release of the new mortality tables is that sponsors could be using outdated figures, says Gavin Benjamin, a senior retirement consultant with Towers Watson. Another problem is that DB plan sponsors will need to cover more retirees for longer periods of time. To manage those risks, sponsors can offer workers who are retiring the option of a lump sum instead of a monthly pension, says Benjamin. Sponsors can also shift the risk to insurers through the plan by purchasing annuities for its retirees, he adds.

Although in DC plan members absorb most of the risks, increased longevity ultimately affects these sponsors, too. While members understand investment risks, they’re ignorant of the longevity risk, says Michelle Loder, Towers Watson’s Canadian DC leader. As their retirement income goals slip away from them, workers are often forced to delay retirement, so firms can end up with many elderly employees who continue to work not because they want to but because they can’t afford to retire, Loder says, adding that this could hurt productivity in certain industries. That’s why DC sponsors need to examine the longevity prospects of their current employees and ensure that these prospects are aligned with their workforce plans, Loder explains. Then, depending on their goals, employers can take steps such as introducing auto-enrollment and improving default fund options, she adds.

Healthcare costs set to rise

The increase in the cost of employer-sponsored health and dental benefits in Canada hit a plateau last year, but expenses are set to surge again as pricey specialty drugs become more prevalent.

This is according to a recent Towers Watson survey, which polled 193 organizations representing
875,000 employees across Canada. The study shows that, for active workers, the overall employer healthcare spend rose just 2.1% in 2012—down from 2.7% the previous year and far below the double-digit increases seen in the 1990s and 2000s. Drug costs are trending at -0.2%, and dental care costs were up by only 1.3% from 2011 to 2012.

One reason costs have levelled off is that many commonly prescribed drugs have recently come off patent, so employers are seeing the result of increased use of generics among employees at much lower prices, explains Wendy Poirier, Canadian health and group benefits leader at Towers Watson.

While overall healthcare costs will likely remain moderate for the next year, they’re expected to swell in the near future—mainly due to the anticipated prevalence of specialty drugs, which are more expensive and treat complex or rare conditions. Specialty drugs are normally used by less than 5% of workers but make up 15% to 25% of the total cost for employer-sponsored drug plans, Towers Watson research shows. Within the next five years, specialty drugs are expected to make up at least 30% of drug plan costs.

Market value of pension funds rises

The collective market value of Canada’s employer-sponsored pension funds hit $1.2 trillion at the end of Q1 in 2013, up 3.9% from Q4 2012, according to recent Statistics Canada figures.

The numbers refer only to trusteed pension plans, which cover about five million Canadian employees. For these plans, the value of investments in stocks grew 4.5% in Q1, outpacing the 3.1% gain in the value of shares on the Toronto Stock Exchange during the same period.

The value of real estate investments grew 3.7%, while the value of bond holdings edged down 0.2%. Foreign investments increased in value by 6.9%. The share of pension fund assets held in foreign investments grew to a third of total pension assets.

Pension fund revenues amounted to $36.1 billion in Q1—the same as in Q4 2012. But expenditures fell 3.6% to $15.5 billion, increasing net income for a third consecutive quarter, to $20.6 billion.

Alberta proposes cuts to public sector pensions

To address funding liabilities and increasing life spans, the Government of Alberta has proposed cuts to public sector pensions.

The proposed changes target benefits earned for service after 2016. One proposal calls for imposing a moratorium on benefit improvements until Jan. 1, 2021. Another concerns the cost-of-living adjustment. That adjustment would be targeted at 50% of Alberta’s inflation rate, but it would no longer be guaranteed. Those who receive pensions before 2015 will continue to get guaranteed adjustments covering 60% of the province’s inflation rate.

Yet another proposal calls for evenly splitting the funding of each plan between employees and employers.

If approved, the proposed pension reforms will take effect on or after January 2016. However, labour unions representing Alberta’s civil servants have already said these cuts will result in smaller pensions that are not protected from inflation.

The province’s public sector pension plans that would be affected by the reforms are the Local Authorities Pension Plan, the Public Service Pension Plan, the Management Employees Pension Plan.

This month in numbers

10.2%: percentage of assets that Canadian pension funds allocated to domestic real estate in 2012—the highest on record — Pension Investment Association of Canada

17.9: the number of sick days, on average, taken by federal government employees for the 2011/12 period—almost three times more than the number of sick days private sector workers took — Treasury Board of Canada

Market Watch

PBI ACTUARIAL CONSULTANTS has created a database for member benefits open to all multi-employer and jointly trusteed plan sponsors and administrators in Canada. The PBI Member Benefits Database allows participants to compare their group benefits plan provisions with those of other groups. The database tracks data such as benefits plan eligibility for seasonal workers.

GREEN SHIELD CANADA has introduced a medication adherence reminder program, stick2it. The service informs plan members via email, text or phone when it’s time to take their medication and refill their prescriptions.

MEDAVIE BLUE CROSS has launched a new app, Medavie Mobile, that gives clients access to their benefits information any time, anywhere. It offers an electronic ID card, the ability to view past claims and a GPS-enabled search function to find and save local healthcare providers.


Face-to-Face Drug Plan Management
Dec. 4, 2013
Fairmont Royal York, Toronto

Now, more than ever, employers need to manage their drug spend effectively and understand the return on their investment. But while new designs and distribution options may offer savings for drug plan sponsors, it’s also important to consider their impact on members. This half-day event will help plan sponsors to develop programs that meet their needs while also improving health outcomes for their plan members.

For details and to register, go to benefitscanada.com/conferences

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