The good news is that pensioners are living longer.  The bad news is that this comes at a price and someone has to pay.  You need to determine if a rethinking your financial situation is needed based on life expectancy revisions.

Background

The Canadian Institute of Actuaries (CIA) recently modified their pensioner mortality tables to reflect the longer lives of Canadians (see chart below).

            Sex Years to life at Age 60 Years gained
Male 27.3 2.9
Female 29.4 2.7

Source:  http://www.newswire.ca/en/story/1206895/long-life-the-latest-threat-to-pension-finances

The intention of the change is to enable pension plan sponsors to better calculate their financial promises to those eligible to receive a pension (or a survivor’s benefit).  Companies with defined benefit pension (DB) plans, which are guarantees to their members, need to assess if funding modifications are needed based on these new longevity assumptions to ensure they can meet their pension promises.

Defined benefit pension plans and your health

Let me be brutally honest on this one…the DB pension plan only cares if you are alive or dead.  No other pension plan needs to consider your life expectancy because you hold all the risk – more on this later.  Even so, with DB plans there are two degrees of being dead – survivor benefits or none.  Your health is not an issue for a DB plan.  Regardless of your level of health, the DB plan pays out its obligation.  One you die the obligation may cease if there is no survivor benefit (e.g. it was not needed by you or you opted out), or the obligation continues at a lesser amount for the surviving spouse.

Living longer and your health

A longer life expectancy does not necessarily mean more healthy years.  The pension mortality tables do not need to reflect this reality since defined benefit payouts happen regardless of your health.  However, you need to understand this because of the costs and other issues that arise when health deteriorates.  Statistics Canada estimates average life expectancy as well as average health-adjusted life-expectancy (chart below).  The difference between the two measures is in the quality of the years that are lived.  The data indicate that a male will experience 9.4 years on average of poor quality life.  For females it is 11.8 years on average of life with disability.  Accompanying these years may be additional costs for special care services, potential relocation, medications and other medical aids.

Sex Life Expectancy Health Adjusted Life   Expectancy at birth Difference between the two   measures
Male 78.3 68.9 9.4
Female 83.0 71.2 11.8

Source: Data from 2007, Statistics Canada http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/hlth67-eng.htm

Other pension plans such as defined contribution

Defined contribution (DC) pensioners (and group RRSP, hybrid plans) hold 100% of the pension risk.  These pension members are responsible for all investment decisions as well as for determining the right retirement payout amount in order to meet their lifestyle needs while also ensuring the money lasts their lifetime.  This differs from DB pensioners who receive a payout amount based on a formula, regardless of the investment results.  The risk for non-DB pensioners is entirely held by the individual.

Should DB pensioners worry?

A risk does exist for those who are currently contributing to their DB pension.  The plan sponsor will likely want to increase current plan participant pension contributions to ensure the obligations of the pension promise can be met.  Someone needs to pay for those longer-living pensioners.  Current DB pension plan contributors are likely to pay more into the plan and therefore experience a decrease in their take-home salary.  Some DB pensioners also receive health benefits.  Many of these benefits have been reduced and this trend is likely to continue.  Other risks include outcomes such as decreased pensions due to company bankruptcy such as the Nortel example.  These situations are fortunately infrequent and their sequence-of-events are more complex than is suitable for this overview.