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Longevity Risk and the impact on funding Public Sector pension plans. Atlantic Connection, Miami, Florida: July 9-11,2014. Marcia Tam-Marks, FSA, Morneau Shepell. Outline. Introduction Severity of Longevity Risk Aging Populations Birth, fertility, death, life expectancy Mortality Tables

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longevity risk and the impact on funding public sector pension plans

Longevity Risk and the impact on funding Public Sector pension plans

Atlantic Connection, Miami, Florida: July 9-11,2014

Marcia Tam-Marks, FSA, Morneau Shepell



Severity of Longevity Risk

Aging Populations

Birth, fertility, death, life expectancy

Mortality Tables

Pension Systems & Implications of Aging Populations

Aging and Public Pension Systems

Mortality case study

severity of longevity risk
Severity of Longevity Risk
  • OECD study January 2012
    • Pension Assets approx. US $2,050 trillion
    • Liabilities > Assets
      • Private pensions partially funded
      • Public pensions unfunded
    • Recent studies estimate:
      • Each additional year of life expectancy adds 3-5% to pension liabilities
severity of longevity risk1
Severity of Longevity Risk
  • Underestimating life expectancy by 1 year would require an additional US$ 685 billion to maintain current funding levels
aging population
Aging Population

What is an aging population?

Median age of a population of a country increases due to:

Declining birth rates

Rising longevity

aging population1
Aging Population

Declining birth rates:

Crude Birth Rate - the total number of births per 1000 of a population each year

Total Fertility Rate - the average number of children that would be born to a woman over her lifetime if:

She were to experience the exact current age-specific fertility rates through her lifetime, and

She were to survive from birth through the end of her reproductive life

  • Life expectancy is the average number of years a person can expect to live, if in the future they experience the current age-specific mortality rates in the population
life expectancy at birth
Life Expectancy at Birth

Source: UN Dept. of Economics & Social Affairs/ Population Division: World Population Prospects: The 2012 Revision, Volume 1: Comprehensive Tables

*WHO – Life Expectancy at age 60 in 2012

life expectancy
Life Expectancy
  • Provides a measure of longevity in a population
  • Since pensions are payable in old age, life expectancy at birth does not provide a good indication of life expectancy during old age
  • Selected data shows a 3 to 8 year increase in life expectancy at age 60 compared to that at birth
impact on pension systems
Impact on Pension Systems
  • Declining fertility and improving mortality lead to a larger proportion of the population over retirement ages
  • Lower proportions of the population at working ages – assuming no changes in retirement ages
  • Increases in old age dependency ratio as fewer workers to pay for retirees
impact on pension systems1
Impact on Pension Systems
  • Depends on how the pension systems are funded:
    • Public systems tend to be pay as you go
      • Increased contributions/cash flows to pay for the benefits promised
    • Private sector systems tend to be pre-funded
      • Increased scrutiny of methods and assumptions used to value them. May lead to increased contributions as well.
impact on pension systems2
Impact on Pension Systems
  • Systems may be deemed unaffordable:
    • Changes in public sector systems
    • Types of private sector plans that are offered to employees
mortality tables1
Mortality Tables
  • Consist of a probability of death at each age
  • Used in actuarial valuations to project future benefit payments
  • Generally reflect mortality patterns prior to the valuation date
  • Standard tables generally do not reflect potential improvements in mortality after the valuation date
mortality tables used in practice
Mortality Tables used in Practice
  • Caribbean
    • PA (90) Tables for Pensioners (UK Tables)
    • 1994 Group Annuitant Mortality Table (GAM 94)
  • Canada
    • 1994 Uninsured Pensioners Table projected to 2020 using scale AA (UP 9420)
    • 1994 Uninsured Pensioner Mortality Table projected generationally (UP 94G)
    • Canadian Pensioner Mortality 2014(CPM)
mortality tables used in practice1
Mortality Tables used in Practice
  • USA
    • RP 2014 Mortality Tables
    • RP 2000 Mortality Tables
  • UK
    • CMI Tables
    • http://www.actuaries.org.uk/research-and-resources/pages/cmi-investigations.
    • SA Pension Plans
    • PA(90) –old tables
financial impact male
Financial Impact - Male

The difference in price is as much as 12% (age 75 CPM2014pu) compared to UP-94

public pension systems

Defined benefit


Partially funded

Assets < Accrued Liabilities

Regular actuarial reviews

Defined benefit


except Anguilla, Bermuda, USVI


except Anguilla, Bermuda, USVI

Actuarial reviews infrequent, if at all

Public Pension Systems

Social Security

Civil Service

projecting future pension costs

Use Present Values

Annual cost is the value of future benefits earned in the year

Liability determined as PV of accrued benefits

Comparison made with current assets

Use Future cash flows

Annual cost is the amount paid out

Projected costs presented as future cash flows

compared with projected wage base (SS) or Gov’t revenues (CSP) to get

pay-as-you-go rate

Accrued liability seldom stated

Projecting Future Pension Costs

Private Plan Valuations

Public Plan Valuations

reducing demographic ratio
Reducing Demographic ratio
  • Increase # Contributors/Tax Payers
    • Economic growth
    • Better compliance
  • Decrease (slow growth of) # of pensioners
    • Award pension at a later age
    • Make it harder to qualify
reducing financial replacement ratio
Reducing Financial / Replacement Ratio
  • Increase Avg. Insurable Wage/Taxes Per Person
    • Economic growth
    • Increase tax rates, new taxes
    • Include other forms of income in contribution/tax base
  • Decrease (slow growth of) Avg. Pension Amount
    • Reduce initial average new pension amount
      • Lower accrual rates
      • Larger early retirement factors
      • Longer averaging period for salaries/wages
    • Lower/no pension increases
    • For CS pensions, partial lump sum conversion rates should use current interest and mortality rates
concerns of aging for public plans
Concerns of Aging for Public Plans
  • Many countries still have retirement ages that were set more than 50 years ago
  • Most SSSs still offer relatively generous benefits
  • Most CSPs are still too generous
  • Many gov’ts do not know the “true” cost of their pension systems
    • If they knew, meaningful reforms may happen sooner
case study
Case Study
  • Pensioner Mortality Study
  • Previous actuarial valuations showed mortality losses, which was evidence that the assumed mortality table predicted more pensioner deaths than the actual experience
  • Valuations were based on 100% 1994 GAM Basic tables from the United States
plan parameters
Plan Parameters
  • Public Sector
  • Final Average DB Plan
  • Contributions by ER and EE
  • Bi-annual indexation
  • NRD 50 to 65
  • Active Liability/Total Liability =54%
  • Pensioner Liability/Total Liability =42%
  • Funded ratio < 100%
  • Actual pensioner data and deaths used for the valuation was compiled over a period of seven years (2006 to 2013)
  • The data was checked for consistency from year to year and with the valuation data
  • A detailed data reconciliation was prepared and the final data focused on pensioners only and excluded beneficiaries
study parameters
Study Parameters
  • The actual-to-expected death ratios (“A/E Ratio”) were calculated by comparing actual deaths to expected deaths using the following four common mortality tables:
    • GAM 94 Static Table
    • 90% of the GAM 94 Static Table
    • UP94G Table and
    • CPM Public projected using Scale B
pensioner statistics
Pensioner Statistics
  • Average Monthly Pension $1,700
  • Average Pensioner Age 70.7 years
results of the study
Results of the Study

The Actual-to-Expected Ratio with 95% confidence interval

results of the study1
Results of the Study

GAM 94 table – A/E ratios

results of the study2
Results of the Study

90% GAM 94 table – A/E ratios

results of the study3
Results of the Study

UP 1994 Generational – A/E ratios

results of the study4
Results of the Study

2014 Canadian Public Sector – A/E ratios

results of the study5
Results of the Study

Mortality experience by monthly pension amount

results of study
Results of Study
  • Actual pensioner mortality experience was lighter than assumed in the valuations
  • Strong correlation between pension amount and mortality rate
  • Female A/E ratios were lower than male ratios
  • The CPM 2014 Public Sector mortality table projected generationally using scale B best replicated the observed deaths among the pensioners
results of study1
Results of Study
  • Using the CPM (Public) Table:
    • Liabilities increased by 10.6%.
    • Funded Ratio (FR) declined by 9.9%
    • If the plan was 100% funded, the new FR=90%
key lessons learnt from the study
Key Lessons Learnt from the Study
  • The impact of longevity on pension plans is not homogenous
  • Pension plans with differing characteristics would be impacted to greater or lesser degrees
  • The actual impact depends on:
    • Benefit levels
    • Maturity of the Plan (pensioner to active liability ratios)
    • Current financial position (funding status)
    • Ancillary benefits (indexation, spousal benefits)
    • Industry
longevity risk mitigation
Longevity Risk Mitigation
  • Public
    • PAYG
    • Reduce benefits (including indexation) or increase contributions (Design issues)
    • Work longer (increase retirement ages)
    • Risk transfer to plan members (Defined Contribution Plans?). Need to consider how to fund any deficit for accrued benefits.
    • If funded – pension buy - outs, buy - ins
next steps
Next Steps
  • Quantify the liabilities (if not known)
  • Review actuarial reports and look for history of mortality losses
  • Review trends, not just point in time
  • Conduct mortality study
  • Be informed about industry best practice - applies to all assumptions
  • Need for Caribbean / Regional mortality study
thank you
Thank You

Marcia Tam-Marks