Who will retire — and when — will be determined by demographics and the effects of the pandemic, the economy, and access to health care
By Ed McCarthy
Demographics matter for pension plans. Global health crises like COVID-19 can cause an increase in mortality rates and a decrease in life expectancy, reducing plan liabilities. On the other hand, longer life expectancies resulting from improved healthcare can increase plan obligations. The inclusion of more women as plan participants can increase liabilities by extending lifespan projections. Another possible influence: Plan participants can choose to work longer and delay the start of their pension payments. The CAiP Forum newsletter recently asked several pension plan experts for their thoughts on how demographics are shaping the Canadian pension industry.
Gauging the Pandemic’s Impact
Euan Reid
The impact of the pandemic’s arrival in early 2020, the subsequent waves and the ongoing struggle with the Delta variant have affected plans. Euan Reid, a Vancouver-based principal with actuarial and consulting firm Eckler, Ltd., says that the 2020 death rate across Canada was about 6.5% higher than would have been expected at the beginning of that year. It’s a “huge outlier,” particularly considering what had been steady improvement in Canada’s general mortality rates, he notes.
Despite the pandemic-related loss of life, though, Reid explains that “a one-off spike in deaths actually is not that significant in terms of liabilities.” He maintains that “what’s much more important for pension plans is what all this means in terms of future trends and future improvements in longevity. And that comes down to things like medical services (that) have really been quite severely disrupted, with people waiting longer for important treatments that they otherwise would have.”
The economy’s ability to recover from the pandemic also influences longevity and in an interesting twist, longevity influences the economy, says Reid. “If the economy is doing poorly, then that’s not good for longevity and, and vice versa,” he explains. “So, if there’s a long-term recession, then that’s not good for people’s health.
A Range of Outcomes
Reid cites research from Club Vita Canada, a research and consulting firm examining longevity issues. Their March 2021 research report, COVID-19 Longevity Scenarios: A Bump in the Road or a Catalyst for Change? developed four scenarios to project COVID-19’s impact. The scenarios range from optimistic to pessimistic and estimate the change in liabilities for hypothetical indexed and non-indexed pension plans:
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Bump in the Road: Trends return quickly to pre-pandemic rate with several years’ longevity improvements permanently lost.
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Innovation in Adversity: Swift recovery with resulting lessons that lead to improvements in health and longevity.
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Long Road to Recovery: The pandemic’s effects linger for a prolonged period, resulting in a “decade of sluggish economic growth and low improvements in life expectancy.”
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Healthcare Decline: We experience more deadly subsequent waves in an ongoing pandemic. Mortality rates remain elevated, and the economy stays stuck in recession.
“These scenarios are intended to put a narrative around what the future might look like because it’s very difficult to grapple with,” says Reid. “There’s a huge amount of uncertainty. Pension funds can combine this sort of scenario analysis with considering their other risks, economic and investment risks, for example, when they’re deciding what to do about it.”
Beyond COVID-19
Michel St-Germain
Although the pandemic is dominating headlines, it’s not the only trend influencing Canadian pensions. Michel St-Germain, immediate past-president of the Canadian Institute of Actuaries in Ottawa, cites the growing trend among employees to work past age 65. According to a November 2017 census survey analysis by Statistics Canada, in 2015, one in five Canadians aged 65 and older reported working during the year. That was the highest proportion reported since the 1981 Census. Of the seniors who did work in 2015, roughly 30% worked full-year, full-time and the survey found that “increases in work activity were observed at all ages, for men and women alike.”
Employers are not prepared for this change in their employment practices or their pension plans, says St-Germain. His sense is that the next generation of workers likely will have a retirement date near age 70, which will be a problem for employers and plans that have a normal retirement age of 65. One possible solution that would allow workers to stay on the job while simultaneously collecting their pension—a situation that normally isn’t viable—is what St-Germain calls “double-dipping.” In this approach, older employees officially retire and begin drawing their pensions, but they remain on the job as a contract worker instead of an employee. “You keep doing essentially the same thing, but you’re not an employee–you’re on a contract,” St-Germain explains. “To me, that makes sense.”
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
