Over the past few decades, improved economies, better nutrition, medical advancements and healthier lifestyles have made it clear Canadians are living longer.
Global concern that current and future retirees will have longer lifespans than previously expected has led the Canadian Institute of Actuaries (CIA) to create the first-ever uniquely Canadian mortality tables. Historically, Canada has relied on mortality studies and tables from the United States.
Based on the proposed new mortality tables, the remaining average life expectancies for 60-year-old males and females has increased 8.3 years and 5.7 years respectively compared to those used in actuarial valuations made 35 years ago.
The most significant increase in remaining life expectancy has taken place in the last 15 years, with respective increases of 5.9 years and 4.2 years.
If medical research succeeds in continuing this trend of increased life expectancy, the fundamental premises underpinning the design of retirement benefit programs will need to be reconsidered.
A longer life expectancy will increase benefit obligations and costs for defined benefit (DB) pensions and other post-retirement benefits, and reduce annual retirement income from capital accumulation plans in the absence of increased contributions.
Though the mortality study is still being finalized, the CIA has issued formal guidance stating the UP-94 tables are no longer appropriate to estimate Canadian mortality without credible, plan-specific experience. Furthermore, many auditors have already given credence to the CIA’s guidance and are looking for support for mortality rates used by plan sponsors for company year-end financial reporting and disclosures.
Who, what, when
This issue affects all plan sponsors of DB pension plans and other post-retirement benefit plans, especially with year-end company financial reporting on or after Dec. 31, 2013, and pension funding valuations due in 2014.
The new mortality tables will also impact plan participants and, potentially, plan sponsors of defined contribution (DC) pension plans and registered retirement savings plans who will need to determine if current funding contributions and investment return assumptions will support continuation of the target retirement benefit where increased post-retirement life expectancies arise.
After a request for comments, the CIA said a number of submissions had concerns over the lack of tables specific to white- and blue-collar workers and the adjustment factor concept. Apparently, the CIA is awaiting the results of the Canada Pension Plan (CPP) study on the projection of future mortality improvements and then the CIA pension experience subcommittee is looking to finalize the report and new mortality tables.
The final tables are expected to retain the base rates of the draft tables, but may be further partitioned to better represent expectations for white-collar and blue-collar groups. The scale for projection of future mortality improvements is expected to come from the CPP study but the adjustment factor concept may or may not be included in the final tables.
The draft tables are already becoming common practice in accounting for private sector pension plans, and the final tables are expected to become the de facto standard for all actuarial bases during 2014.
Accounting basis: The accounting assumptions are management’s best estimate and are typically supported by analysis from a plan actuary. The assumptions are often consistent with the going-concern assumptions of the plan. Many auditors have given credence to the CIA’s guidance on the draft mortality tables and requested support for the mortality rates used in the company financials at Dec. 31, 2013. As a result, many private sector organizations have adopted the new tables for employee benefit plan financial reporting as of that date.
The impact of using the new mortality tables for typical plans is about a four per cent increase to both the actuarial liabilities and current service cost. Plans with non-indexed benefit formulas that are less than 1.5 per cent of earnings are typically seeing increases of around one to two per cent.
Going-concern basis: Actuarial standards of practice require that assumptions be based on best estimates selected by the actuary. In the absence of credible experience for a particular pension plan, the new mortality tables, improvement scales and adjustment factors will represent best estimates. Similar to the accounting basis, many private sector organizations have adopted the new tables for pension funding valuations prepared at the end of 2013 and early 2014. The impact of the new tables is very similar to the impact on the accounting results.
Solvency basis and commuted value calculations: Regulators prescribe these assumptions based on actuarial standards of practice and the CIA is expected to incorporate the new tables into the Standards of Practice for Pension Commuted Values in 2014. The direction of the final tables for commuted values and solvency is not yet as clear as that of the tables for accounting and going-concern but a single blended table by gender that covers private, public sector, blue collar and white collar groups is expected.
By age: The new tables — collectively known as the CPM-RPP2014 tables — show public sector plan participants live longer than private sector participants. As a result, a public sector plan would need to have in its fund $17.70 to pay a 55-year-old male an annual lifetime pension of $1 (a six per cent increase) while a private sector would need $17.20 (a three per cent increase), according to Morneau Shepell. That’s up from the $16.70 used in the UP-94 generational mortality tables.
Plan sponsors of DB pension plans and other post-retirement benefit plans should review all actuarial assumptions including the new mortality table, improvement scales and adjustment factors. This is particularly important where a current assumption may no longer be supported by plan experience or future expectations. For larger pension plans, a mortality experience study may provide credibility to use an alternative table to adopting the new mortality tables.
Plan sponsors of DC pension plans and registered retirement savings plans should review their plan designs to ensure they continue to meet their objectives and there are no unintended implications due to employees reaching retirement with inadequate savings.
The FEI (Financial Executives International) Canada pensions committee is made up Norm Ferguson, chair, in Edmonton, Nigel Byars, Peter Donovan, William Hewitt, Tony Hooper, Kevin Sorhaitz (all in Toronto) and Gerry Wahl in Vancouver. For more information on the CIA draft report for comments, visit www.cia-ica.ca/docs/default-source/2013/213059e.pdf or visit www.feicanada.org.